Perseus Mining's (PMNXF) CEO Jeff Quartermaine on Q2 2014 Results - Earnings Call Transcript

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Perseus Mining Ltd (OTCPK:PMNXF) Q2 2014 Results Conference Call July 28, 2014 7:00 PM ET

Executives

Jeff Quartermaine – Managing Director and CEO

Analysts

Cathy Moises – Evans & Partners

Michael Slifirski – Credit Suisse

Operator

Thank you for standing by and welcome to the Perseus Mining quarterly conference call.

[Operator Instructions] I must advise you that this conference is being recorded today, the 29th of July, 2014.

I would now like to hand the conference over to your speaker today, Mr. Jeff Quartermaine, Managing Director and CEO. Please go ahead.

Jeff Quartermaine

Thank you very much. Well, welcome all to our June quarter report conference call, and apologies to those of you who are listening at an inconvenient hour. Unfortunately, with interested parties like we do [ph] around the world, it's simply impossible to accommodate all the time zones at once, but -- so somebody has to be at the wrong end of the day. Now, a recording of this call will be accessible through our website, so the opportunity to hear what we have said is there and can be listened to later on.

Now as you know, we've released our June quarter activities report earlier today throughout the various trading platforms. And if you haven't had an opportunity to read the document in full as yet, I'd certainly encourage you to do so as I think you'll be able to discern that, after a fairly challenging 12 months, there are some very positive signs starting to emerge about the future of Perseus.

Before discussing these in detail though, I'd like to just take a few minutes to talk about our corporate strategy and what we're trying to achieve. And I think this is important as it puts the quarterly report into context.

Now, Perseus, our primary reason for being is to generate financial returns to our shareholders through both capital gains and, when we're in the position to do so, through cash returns. Now some shareholders may be a little skeptical about this, I suppose, particularly those who invested in Perseus shares at the top of the gold market, and I guess there are a few other stakeholders who might find it a little troubling to hear that Perseus does not place them ahead of shareholders in terms of priority. Nevertheless, that's what we're trying to achieve and it's why we turn up to work each day.

The way we're going about pursuing this objective of generating returns is to pursue earnings growth and risk diversification through exploration success, followed by mine development, followed by successful operation of the gold mining operations. Now in applying this corporate strategy, we consider it absolutely imperative that, as soon as practical, we diversify our income sources. In other words, as soon as practical, we need to have two or more operating mines in our portfolio, generating positive cash flows.

Now if the wisdom of this strategy that we've held for some time is ever in question, I guess the events of the last 24 months have validated that, both -- as incredibly critical both in terms of survival and future prospects, being a single-mine operation in a very challenging geopolitical setting is a fairly difficult thing to do, particularly in a weak gold price environment.

Now the turnkey process [ph] [indiscernible] are assumed as [ph] practical and positive cash flows, and we've always believed that there's little to be gained by building a business on a weak foundation. And it's for these reasons that the last 12 to 18 months have been spent primarily working towards getting our Edikan mine in Ghana working as efficiently and as effectively as we could possibly do.

Now this endeavor is by no means complete, but we have made some very positive advances in the last period of time in the face of some very real technical and human challenges. And I fully expect, having made the advances that we have, that in the next six months we'll be going further. And some of the programs and plans that we've been putting in place will be starting to be approved. Now some of these things are identified in the quarterly report, and I'll talk about those in just a minute.

In the last six months or so we've also started going around preparation for our next phase of growth which will occur, as I said before, when it is practical to put -- to press the button, and not before. And I guess here I'm referring to the Sissingue project in Cote d' Ivoire, and also to our new mine exploration program in Ghana. The progress in both these areas is also in the quarterly report.

So onward [ph] focus in recent times has been very deliberate and we don't apologize for this. And our apparently slow progress may have frustrated some more impatient shareholders and some of the brokers/analysts. But getting the house in order does take time and takes a heck of a lot of hard work.

And in the process of doing this, we've learned an awful lot about our flagship asset Edikan and we have now set it on a sustainable path where it can be very successful if we don't lose sight of what we're doing and if we keep pushing the initiatives that we've started. And hopefully in periods to come my words will be evidenced by much better operating performance across a range of measures, and that even those who are disbelievers today will certainly come to appreciate what we're saying.

So let's turn to the quarterly report and to see what's been going on for the last period of time.

So our gold production for the quarter was 42,540 odd ounces of gold, which meant for the half-year we produced 86,330. Now to some this result might fall a little bit short of expectations. But it has been achieved notwithstanding a couple of significant external events. I mean one was, well, we had a fire in our plant in April. I guess that wasn't an external event, that was due to our own actions. But we also had a government-owned substation failing on us in June. And right throughout the period we've had a fairly unreliable power supply.

Now the first two, the fire and the substation have been fairly well-documented during the course of the quarter, so I'm not going to spend any time now going over that ground. But the last point about the unreliable power supply is an important point and one I'd like to just clarify a little.

What the situation has been is that [Boulder River Authority], the main generating group in Ghana, their generating capacity was reduced through two of their power stations being down for maintenance. And this meant that during peak load periods, power was diverted from industrial customers to domestic customers. Now of course the industrial customers don't vote and that's why -- that took place.

What this meant for us was that for long stretches during the quarter we weren't able to run our equipment at full capacity. And to understand the effect that this had on us, you can see in the quarterly report where we report the hourly throughput rate, and for the quarter we averaged 869 ton an hour, which was fairly well short of our target of 950 ton per hour. But we're unable to run at full tilt the whole time.

Now that certainly held us back throughout the quarter, but the good news is that, by mid-July, one of those power stations came back online, and also at the same time, the government adjusted the settings on the load shedding devices that they've installed on our substation. And this meant that, since about the 15th of July we've been getting full power onsite and everything is back to normal. And I'm very pleased to say that that's also reflected in our operating parameters right now. For instance, the last couple of days that I've got results for, we were running at 988 ton an hour which is just over our target of 950.

So certainly in the last quarter we've had some issues as far as that's concerned, but hopefully, and I say hopefully one never knows these things, that might well be behind us.

Notwithstanding those challenges, we have made some good progress, as I said, actually some excellent improvements in terms of the underlying parameters of the business. Plant runtime in the period for example, if you take out the downtime due to the fire in the substation, it was actually about 91%. And that's, you know, a fairly decent sort of runtime in anybody's language.

This month so far we've been running at around 93% if you take out the power-related issues. So the plant is certainly working well, the maintenance function is working well, and we're staying on the job.

The mill feed head grade, now that's steadily improving as we said it would do, as we moved out of the fringe areas of the ore bodies into higher grades. So we've seen that rise from 0.95 grams a ton average in the March quarter to 1.02 grams a ton in the June quarter. And for instance, this month it's running around 1.06, which is as predicted and is heading in the right direction.

You know, this -- just in noting that grade, one also should point out that that is a blend of the fresh ore that we've mined and the material taken from the stockpile. So the actual head grade of the primary ore that we're mining is well above that -- is well above that level, and certainly starting to improve as we -- as we get back into the main parts of the ore as I said.

The other parameter that's improved a lot during the quarter which is important is recovery. And for the quarter, for the June quarter, we averaged about 86%. And that is achieved with a blend of primary ore to oxide ore of 89 to 11. Now you'll recall that our plant is designed to process primary ore and that the recovery on oxide ore is relatively low. The reason why we put oxide ore through is that it goes through the [indiscernible] than the harder primary ore, but certainly running an 89-11 blend and getting 86% of recovery is slightly ahead of the game.

The major factor that's contributed to that improvement is significantly better performance out of our Gravity Circuit. We're getting about 20% to 25% of the gold recovered through that -- through the Gravity Circuit. It does depend on which pit we're mining and where we are in the ore body in each pit. But that's been a major boost. And we're starting to see just incremental improvements. We've got a number of improvement programs underway at the present time where we've been making minor modifications to the plant. And each one of these things adds to the picture incrementally. And so that's been a relatively positive thing.

So while the abnormal events knocked us off-course to some degree, the underlying improvements continued, and I think that in the absence of any more unforeseen events, and I must admit I'm very cautious about saying things like this, but in the absence of any more unforeseen events, I think that things will definitely be looking up for production in quarters to come.

Now in the cost side of things, quite clearly, if you're producing less gold, you're processing less tons of ore, or mining fewer BCMs, and unit costs again suffer. And that's exactly what did happen to us during the quarter.

Our production cost for the quarter was $1,150 per ounce. Production and the all-in site costs were $1,324. Now just to put this in perspective, we did sell our gold at 1,333 per ounce during the month, so there was the cash margin albeit a fairly slender one, but at least it was positive.

Now, the upper end of the guidance range for the six months was $1,300 an ounce, and I think we -- for the six months we were $1,304. For the 12 months, the guidance range is $1,300, and we were slightly under it at around $1,294. So all in all, the costs, they're very definitely far from brilliant as far as we're concerned, but they are pretty much in line with where we thought they might end up if things didn't go quite according to plan.

Now if we look at those costs and examine exactly what it is that's driving the costs, it does tell a fairly interesting story. The three elements of course of our cost base are G&A, processing and mining costs.

G&A is fairly nominal; it only represents about 10% of the cost base. And it's pretty easy to contain. In fact, during the quarter our G&A costs came down from where they were in previous periods, but that's the easy part to do.

Processing costs went up quite a bit. They went up from $994 a ton to $1,180 a ton, a 90% increase. But it needs to be noted that 13% of this related to the tons -- reduction in tons being processed, and the remainder of the increase came about through maintenance costs due to the fire, et cetera. And we do see these costs coming down in future periods as we tighten the screws on our maintenance activities and make sure we cut out any waste that is occurring in this area.

It's worth noting that the last six months we had gone from our situation in maintenance where we were struggling at times to ensure that we had the right equipment on site for maintenance shutdowns, et cetera, putting pressure on our equipment, to a situation where all of that's been resolved. And so we don't have those issues anymore. The next phase of the challenge now, having got those maintenance systems working, is to make sure that we do it very efficiently. And that's something that we're going to be working on very hard in coming periods.

The mining cost is an area which I've got to say are very much less than satisfactory. In fact, the entire mining function needs some work. Now, mining represents about 55% of our cost base, so it is very important that we get this part of our business working the way we want it to be working.

Now during the period we mined about 5-1/2% less BCMs than we had in the previous period. And that is as a result of deliberately reducing waste stripping but also, as we move deeper into the final parts of stage two of our Fobinso Pit, the area -- mining area has become fairly tight, and so it was a little more challenging to move volumes we had been in previous periods. So 5-1/2% decrease in volumes; however, the cost rose by 10%.

And the incremental increase in the cost base can be attributed to three major factors. One was a very material increase in rise and fall charges under the contract -- mining contract that we have in place. Now these -- the particular parts of the contract that rose were labor. Our contractor unilaterally agreed to a 10% increase in salaries across the board, which had a very major impact on his labor costs which he passed on to us. There were also increases in consumables, explosives and spare parts, which we found to be rather peculiar given the state of the industry. But nevertheless, these were charges that had been passed on to us and the things that we will be looking at very carefully going forward.

The other factor was that we saw an increase in fuel consumption for BCM and material. Now some of this can be explained by the fact that, in this particular period, we were hauling to waste dumps which are longer or further away from the pit than in previous periods, and the climb out of the pit was higher. But I think there are probably other factors involved in that that also bear scrutiny.

The other piece of the cost -- mining cost that increased during the period were in drill and blast. And there the cost increase was deliberate in a sense. We did run a trial for a period of time where we increased the powder factor with the intention of increasing breakage of rock and looking for higher throughput of material through the plant. And on the basis that we got higher throughput, we would -- and it was generating more income than the cost of blasting, continue with it.

Unfortunately, that trial -- well, the trial certainly indicated that that would be the outcome, that we would get much higher throughput rates. But with the problems that we encountered in -- with electricity, made it very difficult to -- for that improvement to stand out as well as we would like.

Now I can speak at length on the subject of our performance in the mining area, but I will choose not to at this point, other than to say that, in coming periods there is going to be a very high level of focus on this matter, and there will be material improvements in our costs one way or the other. We will do what we have to do to get this right, because it's terribly important that we do with cost -- with 55% of our cost base being in that area, we simply need to make some change to the way business is done there. So we'll see how that goes over the next 12 months.

Now, speaking of the next 12 months, we have included in our quarterly report our guidance for the next 12 months broken into half-years. And [indiscernible] that in the first half we'll produce something in the range of 95,000 to 105,000 ounces, 115,000 to 125,000 in the second half, with 210,000 to 230,000 ounces for the full year.

The costs will be, and these are the all-in site costs I might add, will be $1,160 to $1,280 in the first half, decreasing to $1,050 to $1,150 in the second half, being about $1,100 to $1,200 in the -- for the full year. Now quite obviously, we will be seeking to do better than that, but that is the way that we're seeing it at the present time.

Now you might ask, well, given that the production for this year was around 180,000 ounce mark, how are we going to get to 210,000 to 230,000 in the next year? Well, quite simply, it's going to come about through improve grade, as we get into -- back into the sweeter parts of the ore body in the AF Gap Pit and as we move to these inside of our tenement holdings. We're also intending to continue the work we have in terms of productivity improvements, throughput rates, recoveries, et cetera. We do believe there's more to be gained from that. We're going to apply a far tighter or a continuing tight discipline on costs. And as I mentioned earlier, I think the area that we'll be targeting very heavily is the mining area, and I suspect that we will get some savings there.

What we will be doing later in the year is publishing a new life of mine plan. At the present time we're revisiting our resources on the side, taking into account recent operating history plus the recent drilling results. When that work is done, we will do optimization of our pit shelves, look at the scheduling of opening up the pits, and we'll publish those results in our new life of mine plan sometime in the second half of this year.

The objective of that revision to the life of mine plan will of course be to maximize the cash flow, the net present value of our properties. So what it will probably involve is rescheduling the development of some of the pits, trying to bring forward in our schedule pits that have a higher grade. And as you may recall from some of our releases during the quarter, we have picked up some material in Bokitsi that does have some interesting grades in it.

Now another, you know, the other key factor that is going to -- is going to be driving the improvements I've talked about is the performance of our people on the sites. At Edikan, over the last 12 months we have made a number of changes to our lineup and we are starting to -- we've now got a fairly good team in place of people who are very committed to achieving the same goals.

In particular, quite recently we've appointed John Seaward as the Executive General Manager on the site. John has a large amount of experience in Ghana in particular, but in mining in general. He was previously the general manager at Chirano. That's Kinross' mine, and where I think he set in train a couple of initiatives that have led to Chirano being a fairly very decent top mining operation now at relatively low costs.

He was also at Bibiani, Bogasu [ph] and Wiawso [ph]. He's also spent time at PW and Roche Brothers Mining Contractors. And both of those sets of experience again will be very instrumental in bringing some pressure to bear on our mining operation coming forward. So I think John's addition to the team will certainly be very positive and be very helpful for us, having a leader of his quality on the site at Edikan.

As I mentioned before in my opening remarks about the progress that we've made in preparation for the next phase of growth, and I guess the main element of that is the Sissingue project in Cote d'Ivoire. Now you'll recall that we, in 2010, 2011, we did a feasibility study on the Sissingue project which indicated positive economics. We did not proceed at that stage of the game, preferring to wait until we could negotiate a fiscal stability agreement with the government.

Unfortunately, the decline in the gold price and pressure on our cash flows came to bear before we could get the mining convention in place. And so we put the project to one side while we regathered our thoughts over the matter.

Now what we have been doing in recent times is going back and revisiting the feasibility study and looking at the technical aspects of what we were planning to do there. We've done a series of test work to look at different processing routes and to make sure we understand both the geology and the metallurgy before we head off to develop this particular project.

And looking at those different process flow sheets, we've been looking very carefully at the trade-off between capital intensity and sizing of the project. And we are very close to making a selection as to the way forward. I was hoping that by the time this report was published, that we would have chosen the route. But some of the results have been a little slow coming through, and we wanted to give the test work sufficient time to make sure we had the, you know, a very informative set of results. But certainly the preferred route of processing that we see at the present time indicates that we ought to be able to develop this project for a fairly modest capital cost and we'll be getting very good recoveries from the material that we do process.

Now the way forward as far as this is concerned is that we'll make that choice probably in the next week or so. We -- the last set of metallurgical results are due through at the end of this week. So we ought to be able to make that decision fairly soon. And then we'll move into a period where we go into the feasibility study and we update those things in the feasibility study that need updating.

And I should say in that respect, what we'll also be doing is bringing to bear the lessons that we've learned out of the Edikan development. That was the first mine development conducted by Perseus and there's been an awful lot of lessons learnt through that process. So we'll be making sure that they're factored into our thinking as far as the feasibility is concerned.

We'll also be commencing in the next couple of months discussions with the government on a mining convention. In the intervening period, the government in Cote d'Ivoire have changed the mining laws and -- which makes getting mining conventions and fiscal stability agreements in particular a matter of course. And so we'll be sitting with the government in the next couple of weeks working through that.

And I believe that most of the thing -- well, not I believe, I know for a fact that most of the fiscal arrangements that we were seeking when we're talking to the government before have now been enshrined in the law. So it's not a matter of having to debate those particular matters. The discussions will be more of the type of how much we are prepared to community funding and things of that nature. So I don't think there will be a terribly long debate on that subject given that we consider that part of the business very, very important, and we'll be making sure that we do the right thing as far as communities are concerned as we go forward.

The key part of taking the Sissingue project forward of course is financing. We would imagine that a significant proportion of our financing for this project will come through internal cash. We did have the ability to borrow money against the project, and certainly the economics that we've seen at these early stages are looking fairly robust. So, financing something, we'll look at in the second half of the year. And when we're in a position to do so, we'll take it to the board with a recommendation that we go forward. And if everything goes according to plan, we should be doing that very early on in 2015 and moving immediately into development if that's the way that it is.

So the Sissingue project, it has been on the backburner for some time, but I think what you'll see in coming periods is that will be moving forward in permanence and will be a critical part of our strategy to get a second cash flow in place as soon as we practically can, and also offer us a springboard into Cote d'Ivoire which we believe is a very prospective and very attractive part of West Africa to be operating in at the present time.

Now speaking of exploration, in the last six months or so our exploration activities have focused very much on new mine exploration at Edikan rather than the longer-term prospects in Cote d'Ivoire. The reason for that is that what we felt we needed to do was to delineate the new ore bodies or extension to existing ore bodies at a higher grade, such that we could improve the grade of our mill feed being fed to the mill.

Operating at around a gram a ton as we have been in recent times is a very difficult challenge. You only need one thing to get it wrong and you're already behind the eighth ball, it's very difficult to recover from there on a monthly basis. So, finding higher-grade mill feed has been the priority for us and it's been the driver behind an exploration program that we've been working through.

During the quarter we released results on the Bokitsi South deposit where we have a program of around 37 holes I think it was in Bokitsi South. Those results were very good as we reported to the market and they will be fit into our resource modeling as we go forward.

Looking at that [indiscernible] this week and looking at the drilling results with our geologists there, it certainly looks as if we need to go back to Bokitsi South and put some more deeper holes into the deposit at the southern end because there may well be opportunities for extension at the southern end and quite possibly at depth as well. So that isn't -- that exercise is not complete at this stage, we need to go back and do some more work there.

We've also been drilling on a couple of other deposits. We did some work on Pokukrom which is a deposit to the north of our plant. That looked as if it was an oxide deposit. We drilled some shallow holes there. We got some mineralization, but the results weren't staggering. I think what we'll be doing going forward is to put in some deeper holes to see what the primary ore looks like.

We've also started a program to the south of Mampong, and the results from that program should be through in recent times. But I guess the fact that the illegal miners [indiscernible] have been down in that area for some time suggests that there is certainly quite a lot of mineralization there that does need to be looked at more closely.

So, various new mine opportunities there and are readily available to us. And I think that if we are successful in some of these other deposits as we have been at Bokitsi, the opportunity exists for us to be able to improve that head grade quite materially.

Now from a corporate point of view, we've also made some progress there. I guess certainly from a cash perspective, at the end of June our cash balance was -- or cash and bullion I should were sitting around $48.7 million, made up of $36.9 million of cash and $11.8 million of bullion on hand at the end of the -- at the end of the period.

Subsequent to the end of the quarter, we also received another installment of money from the government in Cote d'Ivoire. We've been progressively recovering the VAT that is owed to us. And as of now, a lot of the outstanding liability to us has been reduced down to the 46 million [CD]. We expect in the very near future to reach agreement with the government on 30 million of treasury credit notes and the balance in cash.

So we'll continue to work through with the government on that. It is a work in progress, but fortunately we have been making some forward movement on that even though it has taken a lot longer than we would have liked, but at least we've been able to get a result and we've been able to do it in a way that stands scrutiny to all. So that's a very pleasing outcome.

Our gold selling program and hedging program is in place there. The hedging book at the end of June was 125,000 ounces at an average price of $1,468 per ounce. That includes 70,000 ounces at $1,600 an ounce which will be delivered during 2015.

I mean it wasn't so long ago when hedge books were not looked on terribly well, but certainly this hedge book for us over the next months in particular is important. It's important from the point of view that a significant proportion of our sales will be sold at $1,468.

The other aspect of it is that in the event of a complete collapse in the gold prices, hedge book does give us -- we are in a position where we can close the hedge book out and to monetize that and to put a significant cash buffer on the balance sheet to be able to be used to figure out what we do if the price is very, very low.

So I think that's about it for the moment. I mean having just got off the plane this morning after about 30 hours of travel from our mine site, I'm struggling a little bit. So I will bring matters to a halt there.

In closing though, let me just say that, as we expected, fiscal 2014 has been a fairly tough year, but -- and in some respects it probably turned out a little bit tougher than we expected it to be. We did, however, survive, and we've done that against the opinion of quite a few people who's called out our demise, was perhaps a little bit premature. But really not only did we survive but we've also emerged I think in substantially better shape than what we went into the year, just starting off with.

And I'm very optimistic about our future. Edikan is really starting to hit its steps, and if we can keep improving the head grade of the mill feed at Edikan, we're drilling such as we did at Bokitsi and Mampong and what-have-you, then the future is going to be very good for Edikan, particularly if we can maintain those very high levels of productivity that we've been able to build in previous time.

We certainly don't underestimate the challenge at Edikan. It is never easy operating in that part of the world. And in the next six months we'll be moving part of our mining operation from our western pits into the eastern side of the tenement. And there's going to be a lot of challenges in that area and we're going to need to have full cooperation from the government and community, not to mention our contractors and our staff, to make this happen as seamlessly as we can. However, we've been doing a lot of preparatory work for that and believe that we will be successful in getting that underway.

So -- and the other thing I guess is that for the first time in a long time, things are looking very promising in Sissingue, and we certainly acknowledge that there's water to go under the bridge there, but as endeavor have [ph]s demonstrated in recent times, getting development projects up in Cote D'Ivoire can certainly be done and can be operated successfully. And if we apply the lessons that we've learned over the last 12 to 18 months sensibly in Cote D'Ivoire, then I think that also will be a success and will add to the future of Perseus.

So with that I'll stop speaking and perhaps open the floor to questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions]

The first question comes from Cathy Moises from Evans & Partners. Please go ahead.

Cathy Moises – Evans & Partners

Good morning, Jeff. Just a very quick one. Can you give us any guidance on your capital spend for next year sort of split between sustaining and then the other capital?

Jeff Quartermaine

The capital expenditure for next year, this includes work around the mine, around the existing infrastructure, so, work on tailings dams and around the plant, as well as the commencement of the relocation housing, will be around the $30 million mark.

Cathy Moises – Evans & Partners

And spend on the work on Sissingue?

Jeff Quartermaine

Well, at this stage we haven't published those numbers, and so I'll decline to answer that until we have our work finished.

Cathy Moises – Evans & Partners

Okay. Thank you, Jeff.

Operator

Thank you. The next question comes from Michael Slifirski from Credit Suisse. Please go ahead.

Michael Slifirski – Credit Suisse

Thank you. Thanks for that -- all those introductory comments, for somebody that just jumped off a plane, that was pretty comprehensive and pretty impressive.

Look, I'd just like to explore the costs a little more from my place, and your comments specifically about mining and the mining contractor. And I wonder if you can articulate what you believe is going on there, what -- I mean if I understood what you were saying, there some explainable costs, but a fair portion that wasn't. So can you talk a little bit more about that?

Jeff Quartermaine

Well, look, I'm reluctant to talk too much about it, Michael, because there is quite a bit of commercial work going on in this area at this stage. But look, suffice to say, the contract that we have with African Mining Services was established in November 2009, and so it's been on put since then.

If we look at the rise and fall part of the contract, for instance, the reference date is November 2009, and so by now, with all of the increases that have come along over a period of time and been passed on to us, effect is about 22%. So the bill comes in based on the tons moved and the contracted rates of moving, and then scaled up by 22% each month, and that's a very significant impact.

Now one of the major factors of that is labor. And the way that the contract was written was that the contractor can unilaterally negotiate his labor rates onsite and pass those onto us. And certainly in the last 12 months where we've been negotiating with the unions [ph]. In 2013, for instance, there was a zero percent increase in both salaries on our side, in due reference to the fact that gold prices were fairly soft and that we weren't making any money. Now at the same time, the contract is awarded a 10% increase in US dollar terms, and that's been passed directly onto us.

So that's the sort of thing that has been coming through, and we find that a little bit difficult to work with.

So what we need to do is to sit down the contractor and decide how we're going to go forward. And the simple fact of the matter is, is that we can't keep doing what we're doing. We don't -- we'll need to change the way we're doing business in this area, otherwise we are just going to get what we've always got, and that's not what's satisfactory to us or to our shareholders.

So there will be some changes as far as this is concerned, and we're examining all of those possibilities right now, looking at, you know, from one end of the spectrum, continuing the contract as is with our friends at African Mining Services, all the way through to Owner Mining [ph] and everything in between, all of the permutations and combinations in between, and we're looking at those and we're working out which is going to suit us best in the long run. And I made reference to the appointment of John Seaward before. And [John's] got a lot of experience in these areas and I think he's going to be very helpful in working our way through that.

Michael Slifirski – Credit Suisse

Thank you. Do you have any insight as to what others are doing with their mine labor? Is the 10% that's been passed on to you, is that typical of what's been happening in country?

Jeff Quartermaine

Look, it varies from place to place, but certainly that is the case with some of the larger miners. And AMS's argument to us, which I think has certainly some ring of truth to somebody who's operating our model. Besides, they try to keep some parity between their workforce in one side to another. But our argument is simply this, is that, you know, what happens on, say, new mine site [ph] or gold field site is their business, not ours, and our mine is very different to theirs, and they may be able to support a higher cost structure than we can. The simple fact is we can't. And we can't sustain those sort of increases going forward.

So yes, I think there is -- the industry in Ghana perhaps could work a little bit more effectively as a unit rather than getting picked off individually each time. But nevertheless, what happens happens, and we know what we need to do, and we've been working very hard at achieving the outcomes we need to achieve as far as labor costs are concerned.

Michael Slifirski – Credit Suisse

Is there an end-date to that contract that gives you some capacity to negotiate a little harder than otherwise?

Jeff Quartermaine

The contract expires around May 2016, and there is provision in the contract to terminate early if that was what we would choose to do.

Michael Slifirski – Credit Suisse

Okay.

Jeff Quartermaine

But really at the end of the day, we need to examine all of the options first and to make sure that we select an option or an arrangement or configuration that works best for us.

Clearly cost is important, there's no question about that, that's a major driver in whatever decision we take, but we also will need to take into account the occupational health and safety issues. Not all miners are the same, and certainly some of the local operators have a different take on that to what we would expect to apply.

And the other issue that's very important is the balance sheet strength of the parties that we work with. What we don't want to do is to do business with people who go broke partway through the exercise and need to renegotiate.

So when we look at all of the options, really we'll be examining each of those factors. So, cost, OH&S and balance sheet, and as I said, we'll choose a way forward that works for us.

Michael Slifirski – Credit Suisse

Okay, thank you. And then finally, with respect to processing cost, can you articulate a bit of a waterfall in terms of the costs for prior quarters, the additional costs through the repair work that impacted the quarter, versus the sort of cost advantage you got from the high-powder factor. I'm trying to think of what we should be thinking of in terms of a unit cost or a dollar million cost on a go-forward basis.

Jeff Quartermaine

Well, look, just in general terms, I mean our target on the processing cost is around the $950 a ton. So that's away down from where we are. But certainly by putting more tons through the middle, it's going to have a material impact. And with power getting more stable, that's certainly well within our capability.

But the other areas, you know, is in the maintenance side of things. They said that their maintenance systems have improved, and they have. But what we need to do is to make sure that any wastage is cut out in that area.

And the sort of areas where we have been less than controlled I think is in the use of contract labor. When we have a shutdown, the attitude quite will, you know, in one sentence, quite rightly exists that we need to get back online at any cost. But it's not at any cost. We need to get back online certainly when we have a scheduled shutdown, but it isn't at any cost. And we have to be sensible about how we deploy our own employees, how we use contract labor, how we use contracted [indiscernible] and things of that nature. And I think that there's certainly some opportunity in those areas for us to do better than what we're currently doing.

Michael Slifirski – Credit Suisse

Okay. Thank you, Jeff.

Operator

Thank you. That does conclude our conference for today. Thank you for your participation. You may now disconnect your lines.

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