Philippe Lietard – Chairman
Mark Bristow – Chief Executive Officer
Graham Shuttleworth – Chief Financial Officer
Randgold Resources (GOLD) Q1 2011 Earnings Call May 5, 2011 10:00 AM ET
Mark Bristow – Chief Executive Officer
Good morning ladies and gentlemen, or good afternoon, sorry. A very warm welcome again to our qualify presentation. It's always a pleasure to come here and share the voyage that we embarked on some 15 years ago with you and where we are with our plans. And it's even better when the results are like we have today. So again, welcome.
I think just as an introduction, we had a pretty challenging year last year. We've laid out very carefully what the issues were and how we were going to deal with them. And more importantly, we reminded you [tirelessly] about two things. One is that last year was important for ensuring that we had the necessary operating platform on which to deliver significant growth this year. And the second point that we kept reminding you on, which many of you didn't seem to believe, was that we had the Ivory Coast and Tongon development under control.
And I'm glad to report that, if anyone has bothered to browse through our latest annual report, we titled it as you see in the slide "On Course for Growth." We are on course for growth, and certainly this quarter has reinforced that and given us comfort that our guidance for the year is on a well-laid foundation which we attended to last year.
It's also important, and I always say this, that growth is not the core driver of our business. What drives us at Randgold Resources is creating value, growing value rather than just growing. And we need to put this in that context. Since the start of this company, our goal has been that real delivery of value on a sustainable basis, and that certainly remains our objective. And hopefully today I'll reinforce that by just taking you through how solid our base is that we've built over the last 24 months or so.
So without further ado, moving on to the first slide, as I opened up with, it's always a pleasure to present a set of quarterly results like you're seeing today, which you see all the arrows in the green. Even for the first time in the last four quarters we've started to see the total cash costs coming down. We'll be just 3%, but we're comfortable we'll start bringing it down now with the better grade as we get into the heart of the [inaudible].
During the quarter also, we made steady progress with our various operational and development projects, and one thing I need to highlight is that we didn't miss out on the core of our business, and that's exploration, and you'll see that we opened up a new greenfield footprint in southern Mali as well.
Moving to the operations, just give you a quick update on our various operations, starting with safety. Safety is a key part of our business. You'll see from the bullets that we're making progress toward accreditation across our group. Morila is fully accredited and the last quarter renewed its both safety and environmental accreditation. Morila has just passed its OHSAS 14001 accreditation, advanced now in its OHSAS 18001 safety accreditation process, and it's very good discipline this process. It's not only about ticking boxes. It really focuses management on gap analysis and we can show you that good housekeeping, safety, attention to the environment, also breeds management that are clear about short term [inaudible] controls and other parts of their business, and that system is good for us. So we see this an integrated part of our business.
You can see Morila is really working well, very low incident rate, both on minor incidents and reportable incidents. Tongon has done extremely well considering that we're still commissioning. We did, however, have an unfortunate situation where one of our contract workers was drowned in a pit in the early part of the first quarter. And it's a big reminder that despite our focus on our workforce and safety, that it's critical that we keep reminding our contractors or [inaudible] managing safety
Moving on to Morila, the grand old lady, she's certainly continues to sing. We passed another $40 million quarter one from Morila. Really, when you look at the numbers, steady performance. I'll just remind you that if you look at the real cash costs or aggregate costs, just the total cash costs with the stockpile adjustments, you'll see a very steady cost profile and production was slightly ahead of plan. We're anticipating a steady decrease in grade as we go, but it seems to be becoming more and more efficient, and the result of that with a higher and higher gold price, is more and more money.
We also have made progress on our agribusiness at Morila. We're now down the road on developing four pilot studies to get our head around poultry and beef and we've got a big beehive honey program, which is very lucrative. And really looking to develop our capacity to leave behind once we close the mine.
Talking about closure, we've also this quarter completed our pre-feasibility study on the retreatment of the tailings dam. And certainly at $1200 gold it produces an NTV well north of $100 million. The benefit of it is not only it's a viable business at these sort of gold prices, but it will save us a lot of closure costs, and that we will be able to reprocess the tailings dam and put it into the point in time. And therefore it reduces the requirement to continue to manage the tailings dam post-closure, with the wind and all sorts of other things.
And so the board has approved that management progress with a feasibility study and we'll report back to you in the next two quarters. What it does is adds another three to five years on the life of the mine. Our preference is a three-year life, so 2013 out to about three years, and we've got a plan to be able to manage that. It's slightly shorter, and it's more gold. It's about 220,000 recoverable ounces in the tailings dam.
And just staying in the Morila region, it's not part of the Morila joint venture, but staying in that geographic region, just to point you to our new greenfields project for the [Nimistila] joint venture. And it's a combination of one of our own permits and some privately held permits that we work together with the government of Mali to consolidate in a joint venture where we have 90%, the locals have 10%. And we carry the project to bankable feasibility study. Very similar strategy to what we did in Tongon, exactly how we developed Tongon through the locally held permits.
Exciting in that one is in an area where our geologists feel there is a good combination of structure and little intrusives that we believe our engines in the generation of these gold deposits. And secondly, it's never had any modern-day exploration, so a combination of that is always a good formula in exploration. And the other takeaway is that just to remind you that's rarely the engine that drives our train. That's what's made the discoveries in both [inaudible] we have and that we're not getting seduced by tons and grade and [inaudible] mine building and still investing in our future.
Moving on to Loulo, as we guided last quarter, a lower-grade quarter. Production down, because of that cost higher, but made excellent progress with our recovery plan, particularly at Yalea, and the numbers speak for themselves, nothing untoward there. And the one point I would make is you'll see during the next two and a half quarters is we've got the processed tons up, but the grade has come off 2.5-3%, and that will vary between 86 and 90 depending on the hardness of the ore that we process.
We're generating scat, a little pebble at about 1-1.5 g, because of the hardness of the ore. And that's the reason we're putting in the third [inaudible] at Loulo, because once Gounkoto comes in, it's fully hard, it will be as hard as [inaudible]. And that will take away that scat issue. But in the meantime, it's good economics to get the throughput and stockpile 5-7% of the throughput in the form of scat [at a gram]. We do not account for it. We discharge it as tail in our account calculation. That's why it impacts the recovery.
But apart from that, everything looks good. If you look at the total cash cost it's perfectly in line with the grade, and the exciting thing in Loulo is that we've got grade ahead of us and we'll now start bringing that grade back through the next three quarters. We guided below 3 grams this quarter, we'll get over 3 grams next quarter. We really need to get over 4 grams the following quarter and that's going to be pretty easy with the Gounkoto feed starting to contribute and then we have all our stars aligned in Q4, because we're well into the Purple Patch and [inaudible] will have started [inaudible].
Specifically on the underground, just an update. As we explained to you last time we met, we stopped mining at Yalea, did the final fix ups as far as infrastructure and ventilation goes. We got it done a little ahead of plan. We still ended up mining and hoisting 91,000 tons of ore, just under a gram, which is more than we had planned for this quarter. As part of the real focus, we showed a steady increase in our development rates, both on the declines and the northern Yalea decline and incline, which is the connection from the underground to the main open pit.
We also installed the first of two new crushers in the new level, 113 level. We signed off on the step design and we started developing what we call the succession block, which is the block below the level that collapsed at the end of last year.
And really the big focus now after midyear is grade, quality mining. We're not under pressure to deliver big tonnage, and we'll build it up back to about 100,000 tons, which is designed by the middle of the year.
That's just a long section of Yalea. You can see now where the declines are. We're way over the middle of the Purple Patch. We now come back towards the big red arrowhead to access the northern side of the Purple Patch, and we continue down the declines to the southern site. So the Purple Patch. We are still on track to intersect the Purple Patch in June this year. So nothing's changed.
And you can see the Yalea north decline coming out of the pit. That is a critical path. It both increases our access and isolates part of the mine for development, high speed development, and it replaces some raised [ball] shafts that we had for additional ventilation.
And then you'll see that the mining, the stope mining, we're busy at 13 level stoping, and then down at 113 level is the new level that we now have the crushers established at. And that will be the last level. We're going to have a couple levels in the Yalea north decline, because there's a higher-grade shoot coming up from the bottom of the pit. And then by year-end we'll switch over to the higher-grade Purple Patch region, which is the main Yalea ore body.
Just on Gara, we intersected the first development ore in Gara as predicted, and we're now focused on building mining reserve over the next two quarters. We'll start stoping in quarter three, and the big focus is now to establish our stoping strategy and build the teams to be ready for that event. We'll build tonnage out of Gara quite quickly, up to about 40,000 to 45,000 tons a month of development ore, and then we'll step up to 55,000 in October, 75,000 in November, 80,000 as we bring the first stopes in and then early next year will be [setting out] at 100,000 tons.
Just staying with the northern part of the Loulo region, again the geologists have really focused in the last 18 months on trying to keep the miners in grade with little satellite deposits. Over this quarter the team has stepped back again and really started looking at what have we got, and where's the next big discovery going to be. We're very, very bullish about making another big discovery, and this really highlights the potential.
These big shear zones with the green dotted lines are the planes that host - you can see Yalea, there's Loulo 3, and Baboto's an exciting new project. And you can see how little work has been done on the gaps between these main ore bodies. And in fact almost zero on the Gara structure. And as we build our knowledge - and I'll show you a similar diagram down in Gounkoto, which is equally prospective - and we tie all that together, along with the stuff across the river in [Bambaji], we're pretty bullish about having additional success in this region.
Just to put it in perspective, it took us ten years to find Gounkoto. We drove over it for about eight. And it's a pretty big deposit. Talking about Gounkoto, pretty well on track. Open pit mining commenced as planned, and we've taken our first hard rock blast already. There's not much oxide in Gounkoto. It goes straight into transition.
And we're busy with the fleet mobilization. We've got enough fleet now to manage the buildout. The critical part though is to complete a big civil installation on a river crossing on the main haulage road. And for those of you who are familiar with West African rain, you get a meter in two and a half months, and then nothing for nine and a half months. And that rain comes in early July. And we need to have this all done by June. So focused on that.
Apart from that, we've really ticked all the other boxes. We put a big full six two-stage brushing infrastructure into Gounkoto. It will be able to manage the subgrade material onto stockpiles, which will become part of our [inaudible] strategy in the higher-grade ore, be able to be trucked to Loulo. We're only scheduled to commission that September - October. We have an interim plan. We've got a big mobile crusher that we'll put in place and also in the transition part of the mine, the first two months or so. We'll be able to manage the [inaudible] with explosives.
That's really the operational results for Gounkoto and we'll build out on that table as we develop the operation.
And just staying with the geology of Gounkoto, that's the long section, focused this last quarter has been all about infill drilling in the form of what we call advanced grade control. You've seen the updated reserves that came out with the annual report. And then also the infill drilling of the inferred resources that make up the underground scoping study, which is the central northern [dipping] high grade zone and the southern dipping high grade zone that you can see there.
We also put a big line of deep holes under the mineralization, quite deep, way below the wireframe. Although we got the mineralization, we haven't got any spectacular grades out of it. At the same time we still - our focus now for the next couple of quarters is really infill, the high-grade zones, and constrain the underground scoping study.
At the same time we've brought some additional work, because we believe that as we've seen on strike, the mineralization shifts from one structure to the other, but some exciting work further south and north on the same structure and tying in P64. And also stepping back and testing whether we do have offset as we go deeper as well. That's why we haven't seen the mineralization as robustly as we expected due down at the sort of 850 meter level.
Paul and I have this debate about which is the most prospective piece of ground in the southern part of Loulo, the one on the Senegal side or the one on the Malian side. Without a doubt they are both highly prospective, and we've slowly lifted the [Bambaji] joint venture level of understanding up to where we are in the Loulo permit. And really decide how to reinforce the fact that it is a very broad and highly prospective piece of ground, and we've got more than 70 kilometers of strop and we own the whole structure. And it's certainly focus for a large chunk of our exploration budget for the next couple of years.
The inset is worth just picking up on, and you can see where our Senegal, Mali, Western Mali footprint, which includes Loulo, [Bambaji], and Massawa and then down in the south you've got what we call the southern Mali northern Cote d'Ivoire footprint, and we've just been set up as operated with the southern Mali new set of tenements.
Focusing in on Massawa briefly, we again made very good progress with Massawa work. We have proved that all three of the approaches to processing this refractory will work well. Fresh oxidation by leaching and roasting, but the most efficient and cost effective is pressure oxidation. It does come with a high demand for power and currently the only available power is diesel power. And so on that basis, as we've always guided, the big thing is to find more, and if we can find 2-3 million ounces of less-refractory ore, it retains the economics.
To put this in perspective, it's certainly viable, but we use $800 gold price and we look for 20% ROs, and so we really do need cost per kilowatt hour under 10 cents we always start making it, but our hurdle rate at this stage. We could add 2 million ounces of oxide ore into the process. It quite easily makes our hurdle rates.
You'll see in our forecast we've pushed it far out. In fact, not even in the forecast you've got in your pack. 2015 or so, and really the focus now is just go back to basics. We're very happy with the metallurgy. We've got a bit of work to do with the process design and the way we develop the capital just to get it really efficient, but we've really given it back to Paul and his team to do a bit more exploration.
And geologically, if you look at it, the whole mineralization sits on this base and belt boundary the same as where Loulo sits, just on the other side. And we believe there's huge potential [inaudible] continue to add.
Moving then to Cote d'Ivoire itself, as I started out with, Tongon really the star of the quarter. In every aspect an important deliverable for the Randgold team, and the Tongon management. You know that some people in this audience constantly tell the market that there's only one person who runs this company, it's me. And we can't chew gum and walk at the same time. But to build a mine like Tongon in an environment like Cote d'Ivoire and deliver on our budget, you've got to have a good team. And you can't do it on your own.
And the Tongon team did an excellent job, along with my executive team that managed various aspects of the crisis from security to logistics to the financial situation. And constant communication with the new regime and the old administration. It just shows you our view of partnership and focusing on investments in countries rather than dealing with individuals, and governments really do pay dividends. We're very proud of that achievement by that team.
On top of that, the commercials are great. It's over $400 total cash costs. The only disappointment if you could call it that for the whole quarter was that we didn't sell all the gold by the end of the quarter. We ended up with a significant amount of gold in the vault because as you know there was a little military exercise to effect the election outcome toward the end of the quarter, and we were advised to stand back a bit, which we did.
And we've now started, I can confirm, we're back into normal shipping of the gold, and we will have cleared the backlog in the next 10-14 days. And so I think we are very comfortable with that and the added bonus is that the average gold price for the quarter was about $1360, and we're now over $1500. So we get a little bit extra premium for the stress we endured while the gold sat in our gold vault.
Just some numbers. You'll see that we slowly built the throughput up ending the last month of the quarter, just under 300,000 tons for the month. As we pointed out, we had two streams commissioned. We only ran one at a time, but we had 100% availability because we could do the maintenance on the one that was down.
March 25 we started up both streams as we could see our way clear of the conflict. We're now ramping the operation up. We're very comfortable with our guidance of 272,000 ounces for the year. And you'll see a steady increase in ounces going up to the quarter three and then we should have two fairly flat quarters, quarter three, quarter four.
The impacts of that gold is really the numbers we've delivered today are ex 31,000 ounces. The impact of that is $0.30 per share earnings and about $31 million net profit. So that will come through in the next quarter.
These are the Tongon operating results, nice set of results in this environment in every aspect, and the point I always say new mines are great to open. They deliver great numbers. And it's important we have that steady stream of new operations or at least new areas of an operation that bring better grade and [low strip] ratio, all the good things that impact on free cash flow.
Something we've learned the hard way is as soon as you start mining you start eating away at your reserves or your asset base and so you should start looking for their replacement. And I must say the explorations have again excelled in getting out there in the field despite the environment in Cote d'Ivoire. We did restrict them to 15 kilometers around the mine.
But they've done a great job in developing the first set of [near mine] targets that we'll now work through over the next couple of quarters to evaluate. But exciting geology. You can see even I'm sure the mining engineers will recognize the structure, the potential in that environment.
Leaving West Africa and moving to our newest [inaudible] in Central Africa, DLC, Northeast. Again, on track story. [inaudible]'s made amazing progress. Again, some daunting projects we've embarked on in our recent history, and this one's no mean challenge. The big critical part is to relocate some 3,700 families, one of the biggest relocations, I believe, the mining industry's undertaken in Africa.
I'm happy to report, as you look at this picture, we've already got more than 400 houses in different stages of construction. By October we should be completing about 10 a day. We'll move the first village during June. So we're very much on track. And to give you some feel, the new city's going to have 14 villages, all structured in a township or a city. And it's going to cover an area of about 2,000 hectares. Already it takes about 2 hours to drive through all the road networks in the town. So it's a very substantial town.
And each person gets a 600 square meter plot, parcel deed to that plot, and a house that's a minimum of 16 square meters or 50% more of what he had, whichever's the greater. And we've been building 16 square meter. Most of them are 20 square meters, 40 square meters, and 65 square meters house. So they'll get an electricity point. They have a constant water supply, and a traditional outside cooking area with a proper chimney and [inaudible] setup. And we've designed it in consultation with the traditional leaders and chiefs and so on.
And it's all brick and [inaudible], so lots better than the plastic bags that most people live in today. And it's interesting, we're currently manufacturing 16,000 bricks a day. We'll move up to about 32,000 in little brick factories that are run by local people that we've trained and so we have a big home industry that's supporting the civil project.
On the project itself, we now have the licenses issued for the two hydro sites. We are busy with the pre-feasibility of the first one, which is of course again a critical part to make sure we've got power in by the time we start mining. We've started off on the mining integrated design open pit. We're going to have a twin decline system and a vertical shop.
The partners are completely aligned on the exploitation and development strategy. We're [inaudible] on tender for all the key engineering and construction aspects of the operation. And the first of the 500- or 600-man construction campers are coming in as we speak.
So at this stage, first long-lead item will be placed in July and we'll officially start the construction process mid-year [inaudible] or be at that we've respectively embarked on that already.
And we used to say Morila was a gorilla. I don't know what you'd call Kibali, but fantastically prospective area and some amazing geological ore bodies. The main part of the reserve is three stacked ore bodies for the KCB deposit, made up of the 3,000, 5,000, and 9,000 loads as you see in the different colors there. And as we pointed out last quarter, we finished the model. This is a sort of regional constrain model. It's about 10 kilometers I guess, from corner to corner. Something like that. Not very wide, [inaudible].
Most of the known deposits are on this big sheet that dips down toward the [inaudible] of the diagram. And what we've done is the geos have looked at the trends and they've modeled these like you see in this long section, and we've designed five what we call super holes going half a kilometer down [trend] to test whether the model continues.
And we're nearly complete with the first hole, which we drilled as you see on that section on the left hand side of the slide, and we're very excited because not only did we model the sequence and intersect it as we expected, but we've hit the 3,000 load and the 5,000 load, and everyone's holding [inaudible] as we go toward the 9,000 load.
And we get it out all right. You can see the gap between the wireframe and our drill hole, and that's the sort of potential that you get in this system. And before you ask the question, all that is accessible from the vertical shaft that we've [inaudible].
I thought it might be worthwhile just to stop and remind you that the real engine that drives our business is exploration. And while we understand that all the other activities we do are critical, because what it does is it converts the value we create in exploration into dollars and cents and dividends and wealth for all the other stakeholders. But it's the exploration that creates the value.
And as we start posting increases in our production and we also as a reciprocal are guiding against reducing our asset, because we're mining, so it's very important for our exploration team to look at our business model in exploration and are we doing the right thing to be able to lift our potential to find more.
And Paul and his team have spent a lot of time on this, and really when you take it all down, there are three big drivers in exploration: time, and we've invested a lot in that; imagination, and there's never any shortage of that throughout our team; and the third one is statistics, otherwise known as gambling.
And that's a big part of exploration is the numbers game. You've got to have numbers and you've got to turn them over, and you've got to be lucky sometimes. And we're very mindful of that, and one way - and this is our model, resource model we call it, resource triangle - and it's driven by generating ideas a lot like fund managers would. You know, invest in early-stage projects, look at different levels of quality and confidence, and we will filter them up and we discharge most of them. About 30% don't make the first filter. And so we rotate at the bottom and then slowly filter out and when it gets to the apex you've got an asset.
So the biggest, best way to increase the number of targets in your portfolio is to add another footprint. You can see the impact of this two or three years ago in Mali is really a focus on the southern part of Loulo and the [Bambaji] joint venture, and Massala. And you can see again DRC as significant it is and it's going to continue to grow the numbers. You can see also that Ghana has dropped off our portfolio because eventually even the footprint shrinks if you don't find anything.
And so if you see the apex there's a lot more in 2011 than there was in 2008, and the thing I want to leave to you is that we're very mindful of what we do today is important for five years out when we now have built out our last mine in the form of Kibali, and we've delivered on the current debt.
And so just to remind you, footprints are important for us. We look at only geographical addresses that meet our investment criteria, our political filter, and that can produce 3 million ounces of minable gold. And there are not many of those addresses in the world, but there are three in Africa, which the third one is in South Africa, which is largely mined out. That's why you've got two in [inaudible].
So about growth, this slide really sums up my personal philosophy and the basis on which we run this company, and that is that the value of any gold company is its reserve base, and we calculate our reserves at an $800 long-term gold price. More importantly, it's reserves per share, which is the yellow line, and so you can see despite growing our reserves, we've grown them per share.
And the other key one is quality. And again we're one of the few companies on this planet that haven't deteriorated the grade in the name of increasing ounces of reserve. And to drive that home, we have an industry which if you sum up in these two slides, this is the top so many companies in the industry, and this is the change in grade of reserves between 2005 and 2010. And you can see that over 80% of the companies in the gold industry have significantly downgraded their grade of their reserves in the last five years.
There's no doubt that happens when you see people, even the big guys, using [inaudible] $1,000 an ounce to calculate reserves. More significantly is if you look at quarter four milled grade for the same set of companies and you compare that milled grade against their reserve grade, that they've just declared now, you can see that again, 70-odd percent of the mining companies surveyed show a significant [higher] grading of their reserves.
And the impact of that in the medium-term is why I would suggest everyone is saying costs are going up. Because when you're mining 150% more grade than you've got in your reserve, you don't have to be a mathematician to work out what the total cash costs are going to be for the 25% reduced grade of your reserve in a couple of years' time.
Interesting that of the companies that sit up there who are mining below their reserve grade. And again, it's not a direct correlation because it also impacts on whether you're mostly underground and exactly which geographical region you're on, but it's a good indication. I always say to our guys, the one thing you can't do in this mining industry is put gold in the ground. Only god does that. And what is there is there, and you've got to mine it properly.
This is our forecast, just to reinforce it. You can see that it really highlights why 2011 is so important for us, why 2010 was so important. A big step in our production profile, a significant expansion in our group as far as corporation goes and the ability to deliver on multiple fronts. And we're very focused on that. And then a steady increase.
Again, four years ago many of you were a bit panicky because we had three months to build - we've got one left and a few touch ups now. And we get there. And you can see once we get over this year, it's just a steady increase up to beat the million-ounce mark, which I am acutely aware I think we'll be the first one to meet our promise if we do, out of the mining industry. Everyone fails. It's like trying to make [inaudible] in cricket, because you get run out at 99.
I always remind everyone that we also have the fact that pretty pictures and nice promises don't mean anything if you can't distil it into numbers, and these are our numbers. And they all speak for themselves. As I pointed out, every arrow is in the green. And the encouraging thing, again, albeit a small decrease is the first turn in the total cash costs.
I would remind you again that we put everything back into those total cash costs, including share options. We charge everything back to the mine. The other point I would make is that if you add up the cash, cash equivalents, and the gold at the end of the period, again for the first time our net change in cash and gold was about $9 million.
We've just peaked out at our capital profile, and we'll start now building, albeit slowly to start with, but we're forecasting to end up at the end of this year with more cash than we had at the beginning of the year. And that's also rewarding for us. And one of our big focuses as management is despite the fact that we've got a strong balance sheet, we want it to be even stronger. We've got Kibali to pay for in a couple of months up.
And my traditional comparative marketing. We certainly suffered from the market's view of the Cote d'Ivoire risk last year, and as I pointed out then we're not inexperienced in dealing with big corrections in our stock price. The big thing is we haven't issued any new stock. We're still intact as far as our growth goes, and our big challenge is to slowly deliver on our plans and to recover that position for our shareholders.
With that, thank you very much for your attention, and I'd be delighted to take any questions.
Unidentified Audience Member
In Ivory Coast, since the new government has taken control, has there been any discussion of revisions to the tax and royalty regimes that you're operating under? And separately there, now the new government is in place, do you think that there's the chance they'll reactivate discussions about moving to hydroelectric power? And what do you think that would do to your cash cost if you did?
Mark Bristow – Chief Executive Officer
The second question first. We are already connected to the grid to run the grid linkage at 90 kva already and that will bring our cost down from $0.30 to under $0.10 a kilowatt hour. And that is hydro and gas. So that's done.
We've got about two more weeks of work on our big substation to be able to switch the switch permanently, and then about two weeks to iron out all the gremlins, which is normal in a big installation like this. There's a 67 kilometer linkage into the grid.
And that should be done during June, which is the plan, and in time for us to be able to get the benefit before the introduction of the [inaudible]. We're not in big power consumption at the moment, because we oxide. So in a full, like Loulo, diesel-power is about 25-30% of our cost. Diesel. That's including the mining fleet and the power. So a reduction of $0.20 out of $0.30 a kilowatt hour in the power is substantial, probably 15% of cost. And what we're doing is offsetting that, really, before it becomes an issue [inaudible].
On the government side, I've said this a number of times, and I'll repeat it, we negotiated the mining convention, which is our investment convention plus the mining license and the various terms of our investment with the coalition or transitional government, which included Mr. Ouattara and Mr. Gbagbo. And in fact the minister of Mr. Ouattara, the minister of finance for Mr. Ouattara signed our convention. We have worked with the Ouattara team from the first of January. We've met with his ministers. We met every week in the [Golf] hotel. It's the government. It was always the government. They won the election.
And we have run the business in the last quarter under the Ivory Coast law and our conventions and we have no reason to believe it will change at all. In fact, if anything, the indications are that there will be additional incentives developed in the north. Because that's where he comes from. And that's what's required in that country. And we've shown it. We're the biggest investor in Cote d'Ivoire, and you see what happens in mining. The engine that creates.
In a country in which the north had nothing, and in the middle of the conflict, one of the big drivers in our engagement with Ouattara and the Forces Nouvelle was that they really needed us to continue to operate because the last thing they needed was a rear guard action from workers that had been laid off because of a crisis situation in their own back yard. And that was one of the key drivers. I mean, there's many drivers, and even with the regime's administration, we continue to work with them in a transparent and professional way under the legislation all the way to the end.
This Ivory Coast situation is about one man, one very stupid man, that lost the election and didn't want to leave. And you don't [overtax] a country in three days, because the whole country doesn't like it. So we don't have a problem at all.
Yeah, the normal pressures of new politicians, and delivering - we've worked under the law all the time, even duties and imports and all that sort of stuff, with all the forms, and we've worked with the authorities, both Ouattara and Gbagbo, because the one thing I reminded everyone during crises like that is it's easy to become reckless and just do things to survive, but as soon as it stabilizes, the bureaucrats are still there. And you'll end up having to explain why you did what. So we're pretty much in line with everything. We didn't pay our royalties. Mr. Outtara's team will get all the royalties. And the other taxes like [inaudible], that all [inaudible].
Unidentified Audience Member
And the [inaudible], how's that progressing?
Mark Bristow – Chief Executive Officer
As you know, the government of Mali changed about three weeks ago. Mali has a presidential election term end early next year and under the Mali law if you're a government cabinet minister or prime minister and you elect to become a candidate for presidential elections, you've got to give up your job. And the prime minister stuck his hand up three weeks ago and said he's going to jump in the race, which means that his government dissolves. They replaced it with a new government, again the same president, just a new government. We've caught up with them. The DMGM, which is the director of mines, is fully in the process. I met with him last week. We're expecting to have that behind us by the end of this month, in line to start [feeding] Gounkoto through June. So we've got drafts of the poll agreement with the government. We've spent many hours going through the model. We've been working out how we account for the gold and so on.
Unidentified Audience Member
Just to check your confidence levels on Loulo, is [inaudible] sort of the low point and it just keeps going from here? Are you confident in your guidance that you set up previously?
Mark Bristow – Chief Executive Officer
I'd just maybe put it into perspective. I'm very confident around Tongon, and I'm extremely confident about Morila and Loulo I'm quietly confident. We've got two more flat quarters. It's about grade. I'm completely relaxed. We've cracked the underground. I'm very happy with - we're on top of all the issues. I was saying I can even go down in my working clothes underground without being covered in sweat, you know? We've got the ventilation working and it's a professional [inaudible] rather than a confusion and panic and sweat.
We've actually brought back the build out in Yalea, still yet in planning to get midyear to 100,000 tons, but really the guys are starting to mine grade that we're never going to process, and we have the flexibility now with the new design and the plan that we can actually just pick out the higher grade [inaudible].
By June we'll have a couple of years developed reserves, so we're not under stress on tonnage even. And just to give you the guidance, the guidance made up of 1.3 million tons of Gara open [inaudible] ore, 125,000 tons a month minimum of Gounkoto ore starting end of June, and the rest we're going to pull from the underground of which the first quarter is all really Yalea. We've got a bit of tonnage coming in from Gara. Gara builds up on its development tonnage quite quickly and we end up with about 2 million tons of 3 gram ore on stockpile by the year end, for the first time in our history.
So as we go through - this quarter is still a tight quarter on grade where as we guided at this stage still on track to beat 3 grams. We were under 3 grams in the first quarter. We'll beat 3 grams in the second quarter. We need to beat 4 grams in the third quarter, 5 grams in the fourth quarter is an easy target, because once Gounkoto's up and running, we're in the Purple Patch mining by quarter four. We're good. And then we get the third [Mullen] in December, which takes away the pressure on the processing.
So it's tight, as I described in my presentation, a tight two quarters and then we're away. But I think the doubt is gone. So we're a lot more confident about our business. Gara came in. We hit ore as planned. So it's been, touch wood, a trouble-free underground mine compared to Yalea. So I think the takeaway is we might have screwed up on Yalea, but we've definitely learned for Gara.
Do the arithmetic, 440, 150 to 160 for six months, and then the rest to make up 440 in the second it's [all grade].
Unidentified Audience Member
Just a quick question about Kibali and the partner seems less enthusiastic about the revisions to the timing and the various communications you're giving about that. In fact they seem unwilling to talk about it when pressed.
Mark Bristow – Chief Executive Officer
Yeah, I think, [look, I have a] market. All I can do is [inaudible]. You buy me a good bottle of Australian [wine and we'd] produce gold in 2013. And a good bottle of South African red wine and we'd produce gold in 2014, and I said why is he trying to deter me from starting in 2013? And that was a public statement. So look, we know how to build mines, and Anglo has a process and we respect that, and it's actually been very good for us in the way they approach things. They've got a very clear deliverable procedure and I think if you talked to Mark and Brian and our team everyone will tell you that where we were a year ago I think we've [inaudible] a lot. We're not going to do it for them, but we'll give them the information to get over their hurdles.
At the same time, we've also delivered. When they first saw what we were planning to do, they didn't believe we could get rid of the illegal miners. We did that. They didn't believe that we'd start building on time for the [inaudible]. When they were there a few weeks ago they were blown away. You know, Ryder's [ph] here in the back. He's running the show. We've done all their sort of [inaudible] and analysis on looking at what's the best way on the [inaudible] and we build mines all the time.
The processing side I think we're all closed out on that too, and that took some doing. But it's off-the-shelf stuff for us. It's one mill from Loulo and one mill from Tongon, so we've split the [inaudible] process. The sulfide [inaudible] into oxide. We handle the requirement for clean [inaudible] plan, [inaudible]. We've got huge flexibility in our process design to deal with oxide and the buildup in the hard rock. We're not going to cyanide the tails of the full flotation circuits in the hard rock. We take a 1.5% hit on recovery - because in that high rainfall area, one thing we've made a decision of at Randgold, and ahead of all the big guys, is we have cyanide destruction [plants] for all of our processing infrastructure. And in BRC, if you put cyanide onto their tailings that is considered high-hazard tailings, and therefore you need it fully lined and you can't discharge [inaudible]. That rainfall you [inaudible].
So we really looked at all that, and again with Anglo's technical depth - and we brought in plenty of international experts. We've got our head around that side. On the declines and the shafts, again they brought a lot to the party, particularly on the shaft side. I think when we showed them the first look at it they got a bit panicky because they like to see every bolt, nut, and even ventilation parts. Now, the one thing you're sure about [inaudible] to get down there, 400 meters, it's going to change. But at the same time you need to [apply] your mine to be able to manage. One of the big things that [Rod]'s still got to sign off on - he's busy with [inaudible] - is just the water balance, you know, [pump it]. And that's just starting - pump. He's been busy with that.
Final rock mechanics on the shafts, we've already moved the shaft once. That's something we're pretty clear about [inaudible] make sure it's the right - you know everything about it, don't go and think the shaft is out of line. But those aren't critical path decisions, so now I'm pretty sure I'm going to win my bet and it's not going to be a bottle of Australian red. [A case of Margo] maybe. [Laughter.] You remain neutral.
Yeah, just to finish that conversation, the dynamic - and that's why Mark approached us to invest in Kibali. He said one is he needed growth, and he was busy dealing with his business of settling it down. Two, they want to build things cheaper, and they want to learn from us, and from our side we realize this is a big, big engineering undertaking, and having the extra technical depth that Anglo brings is good for us.
But we don't want to give up our entrepreneurial - and the thing that saves you money in building mines is getting it done quick. And we don't do - we control our own destiny. We construct our own mines, and we've got a team that is built now. Tongon's the third big mine in Africa, and the same team. There's no other team in the mining industry that has the experience we have, because although [inaudible] and Anglo have built mines, they're all gone. They're all new guys on the block, and we're the same guys who built those mines, and that's why we get the [nice] surprises like Tongon. We learned. [Inaudible] says that mine [inaudible] at Kibali will be the perfect [mine]. [Laughter.]
Unidentified Audience Member
Just going back to your production guidance, I think back in March you mentioned that you were very comfortable with your targets provided FX rates and input costs remained the same as when you made your targets toward the end of the year. Now we know the oil prices shot up considerably since the turn of the year. The dollar has weakened very sharply against the euro and above other currencies. Do you expect those changes to have any impact?
Mark Bristow – Chief Executive Officer
Sure, there will be impact, absolutely, but right now, for this year, our biggest single driver of the cash cost is grade. So it does dampen that impact. Until we steady out on the grade. It will have impact at Tongon, for instance, which is a very one-grade ore body. There's no [inaudible] high grade there. It's just [inaudible] grams. But then again, we're offsetting that [inaudible] because we're going in the grid, and that's always going to be the case, at a predetermined price. The forex is an issue in [CFA] terms as far as Mali and Cote d'Ivoire go. In Congo we're dollar-backed. Everything's dollars. So we're hedged on that basis. The [inaudible] pressure on the input cost - the big one is FX and diesel, and we are hedging that in the sense that we are moving away from full exposure. We've got a heavy fuel initiative where we've now got a large baseload of medium-speed engines at Loulo, which are going to come in with heavy fuel, and that's about a 20% savings on fuel cost [for efficiency]. So we are managing that.
Unidentified Audience Member
Just a question on the Gara underground development. You've come across some water in the sections and could you just clarify a little bit of that, whether or not it's going to be a problem on mining costs or excess [inaudible] going forward?
Mark Bristow – Chief Executive Officer
No, it was the first experience for us of a lot of water. We had to redirect. We redesigned the turn and we intersected the aquifer on the turn of the main decline. We redesigned that. We've got it under control pumping-wise. AUMS, the Australians that are doing the development, the contract, are pretty experienced with that. And it set us back for a couple of weeks. This quarter they've done very well on catching up. I think what we take away from that is Kibali - is water balances and water tests. We've got some old [Belgium] shafts and rudders, [inaudible] a pile of actual dedicated water testing holes. Because when you look at the size of our excavations and the amount of water around there you really need to do that test work and if you've got the pumps you can handle underground water ingress. If you don't have the pumps, you're in big shit.
Right, [inaudible]. You're welcome to have a glass of wine. We have quite an extensive group of our executive team here today. David, our legal counsel and [group] secretary. Paul Harbidge, the head of exploration. Rod Quick is project development. He's really in charge of our feasibility studies, and his big baby at the moment is Kibali. [inaudible] Anyone who wants to quiz on where we are there you're welcome. And then we've got Ashley and [Rul], finance and IT. And Lois is head of our communications. [inaudible] on our circulation, drop of your business card. And the man with the money, Graham, our CFO, is also here. I think I've covered everyone. So thanks very much for coming.
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