OceanaGold's (OCANF) CEO Mick Wilkes on Q4 2015 Results - Earnings Call Transcript

| About: Oceanagold Corp. (OCANF)

OceanaGold Corporation (OTCPK:OCANF) Q4 2015 Earnings Conference Call February 18, 2016 4:30 PM ET

Executives

Sam Pazuki - Director, IR

Mick Wilkes - President and CEO

Mark Chamberlain - CFO

Edward Sit Woon - Corporate Controller

Analysts

Benjamin Asuncion - Haywood Securities

Michael Slifirski - Credit Suisse

Ovais Habib - Scotiabank

Michael Gray - Macquarie

Chris Thompson - Raymond James

Brett McKay - Deutsche Bank

Reg Spencer - Canaccord

Operator

Good afternoon, ladies and gentlemen and welcome to the OceanaGold Full Year 2015 Financial and Operational Results Webcast and Conference Call. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question-and-answer session. [Operator Instructions] This call is being recorded on Thursday, February 18, 2016.

I would now like to turn the conference over to Sam Pazuki, Director of Investor Relations. Please go ahead.

Sam Pazuki

Good afternoon, and good morning everyone. Welcome to the OceanaGold 2015 full financial and operational results call and webcast. Thank you for joining us today. My name is Sam Pazuki, Director of Investor Relations for OceanaGold in Melbourne and on the call with me today are Mick Wilkes, President and CEO; Mark Chamberlain, Chief Financial Officer; and Edward Sit Woon, Corporate Controller. For those of you who wish to ask questions we will be taking them through the telephone only and following the conclusion of the formal part of the presentation.

Before we proceed however please note that all references in the presentation that you're about to hear adhere to International Financial Reporting Standards and all financial figures are denominated in U.S. dollars unless other stated. Also note that the presentation contains forward-looking statements, which by their very nature are subject to some degree of uncertainty. I would now turn it over to Mick Wilkes to begin the main portion of the presentation.

Mick Wilkes

Thanks, Sam and good morning and good afternoon to everybody and thanks very much for joining us again on our quarterly call and giving you an update on our financial results. I'm very pleased with the 2015 a year that blossomed and just going through some of the highlights, one of the most pleasing things is a continued improvement in safety performance across the business and year-on-year we've seeing that. We also received an award from the President of the Philippines for most environmentally responsible mining company which for us is quite a valued award. Importantly we declared a annual dividend for the second time of $0.04 per share demonstrating a robust magnitude of the business.

Record gold production at just under 420,000 ounces, net profit for the year was $53 million on revenue of 508 million. We've obviously completed the very successful transactions of Romarco and Waihi. We've completed the connection to the power grid and connection of that and we're now running on power from the grid in Didipio. As promised we declared a maiden resource at Coronation North and we also increased subsequent to the year-end we increased their equity position in the exciting new exploration play in U.S. called Gold Standard Ventures.

Let me go through the result summary and we've seen these numbers before for the production and I'll just go through them again. 419,000 ounces which is just ahead of our guidance and copper production is within guidance at 23,000 tonnes, all-in sustaining costs within our guidance at $709 per ounce, so demonstrating the continued strong cash flow in the business. On the financials revenue was down, probably as reasons to do with the metal prices but EBITDA was still strong at 193 million, with net profit of 53 million which is down because of the lower revenues and some transaction costs associated with the M&A.

Turning onto Slide 5, and the safety performance I talked about, we've seen a 78% reduction in TRIFR, Total Recordable Injury Frequency Rate from 2011 to 2005 and this really does underpin the success of the company and demonstrates he improved safety of the business over the past five years and we continue to work on that very hard. The environmental award on Page 6 presented by the President Aquino in January of this year, it's quite significant, in that it does demonstrates the recognition that we have in the Philippines as a responsible mining company, recognized by the president and his office and that we look forward to receiving benefits from that in the future.

Operational performance, turning on to Page number 8, just on Page 7, there's picture the overpass at Haile and the other picture is the talent facility at Waihi. Page number 8, the Philippines, so we've increased production throughput through the mill to 3.58 million tonnes for 2015 and you can see there on the graph we've achieved out target every year for the past three years as promised 4 years ago. Production was higher, than the guidance at 127,000 ounces on the back of slightly higher grades, copper production as I said is in line with guidance. All-in sustaining cost was higher the guidance and that’s likely to do with inventory movements around the operation to do with all inventory movements.

We have completed the commissioning of the power grid we now own grid power and it’s providing stable good quality power recently. As I mentioned record throughput for the year and we expect that to stay stable now in years to come. The old inventory stockpile has increased to 16 million tonnes so now got a sizeable asset there that we can utilize during the underground mining phase of the operation. By the end of 2017, we expect that order inventory stockpile to increase to 24 million tonnes so another 8 million tonnes out of the 2016 and 2017.

And of course the underground development continuing to advance and by the middle of this year we’ll be looking to -- we’ll be at the top of the underground mine design and planning to start drilling at that for extending the resource a bit. The operating statistics a good quarter for safety, for the year we had again one loss time entry at Didipio we are still working hard to reduce that to zero. Gold production was strong 33,000 ounces in the fourth quarter total ore mined was 2.28 million tonnes and waste mined was 5.75 million tonnes, mill feed as predicted at 910,000 tonnes similar to the previous quarter. So we have reached a steady state in the mill and we can use that throughput rate in going forward.

Recoveries are still strong 89% for gold and 95% for copper you see the big driver is higher for gold in this last quarter at 1.27. And this year we have put operating costs for the full year you can see there the mining costs and the milling costs and the G&A concentrate selling costs includes the trucking to the port the shipping cost to the smelter and the handling the cost and Didipio assets which we negotiated and set at the start of each year. So, for those of you modeling Didipio operation there is some real 2015 numbers that we can use in your analysis.

The outlook for Didipio is pretty strong this year 130,000 to 145,000 ounces so an increase in gold production, a slight drop in copper production as we had envisaged of about 10% down to 19,000 to 21,000 tonnes. The all in sustaining cost will be similar this year around $300 and $350 per ounce. We’ll continue to advance the underground development and as expected as suggested before expanding around $45 million on that development this year. We’ll be drilling from the top of the underground in the middle of the year we are in a position to drill and we’re continuing to advance exploration targets near the mine site.

And moving on to Waihi the second half highlights because we took economic ownership of Waihi as of the July 1st so these numbers pertain to that. A very good second quarter and almost 70,000 ounces produced in the half year at very attractive all in sustaining cost of $530 an ounce. The business is fully integrated into Oceana now although of course there is ongoing work in terms of culture to bring it fully into the business and that’s creating opportunities for us to seek improvements in productivity and decreases in costs going forward.

We have commenced an extensive exploration program and presented some solid results and we’ll provide more of that in the coming months. We have currently seven drill rigs on site and three underground and four on the surface going on drilling. And some of those results are shown on Page number 12 I think the mine -- is that we’ve shown you these before in the press release. But just a reminder about the quality of this operation through which 4, 5, 6 grams from 6 to 20 grams, so these are extensions in infield to the known veins at Correnso, Daybreak, Empire and Quattro and a new vein unmanned doing a new discovery that we have there.

So, all good on the Waihi front very strong production forecast again this year, 115,000 to 125,000 ounces all in sustaining cost certainly higher 7 to 750 reflecting the lower production rates so we’re in 60,000 ounces per quarter which is a function of drive. Additional drilling results will be released full widely during this quarter and we continue to get opportunity to reduce cost base, unit cost base, through increases in productivity and cost reductions. We have commenced an access, re-accessing the open pit using a different design which will provide some access to the bottom of the open pit and opportunity to lose the 65,000 ounces that existed at the bottom of that pit. We're looking at other opportunities around the pit. The extension exploration program around Waihi Gold also be regional beside over 45,000 meters plan.

Moving onto Macraes & Reefton, a strong year for Macraes & Reefton particularly at Reefton which performed well and I am very proud to say that we had one of its best, if not its best year in its last year of operation before going into care and maintenance. So good gold production in 222 sales in ounces all of sustaining costs of $961 per ounce obviously assisted by the lower exchange range which you can see has dropped significantly down to around $0.66 to the U.S. dollar and also the lowest fuel prices which assisted in the Macraes in particular. After 25 years of operations they guys and girls at Macraes have reached a record throughput of 6 million tons and still working hard on finding every opportunity or finding every way to eat more value-add on that operation operations, so great efforts by the team at Macraes.

The weaker New Zealand dollar and the lower fuel prices have driven cost lower, we did announce in May and it was combination of course as mentioned before and a very strong safety performance. And I will now special mention on the recent operation they had their safety performance ever at Reefton in the year and they're closing down which is a great achievement and one that was very proud of. The operating statistics of Macraes zero LPIs there for the year and also great achievement. The product was strong all mine 670,000 tons for the quarter and 2.7 million tons for the year which was up on the previous year and underground mining diluted at the million tons from the underground which is a very strong performance as well. The Mill feed drives as a result is an area there on the -- sorry mill feed was just 6 million tons for the year up from 5.7 the year before as I mentioned.

Mill feed drives steady at around 1 gram pretty usual from the grad stone and recovery of 82% and again we put in unit cost for 2015 for the Macraes operation going forward, utilized going forward. And the Reefton operating statistics, we did have a last time injury in during the year but notwithstanding that it was a very strong year from a safety perspective. Gold sold is 16,000 ounce in the quarter starting to make up some of the shortfall from the year for concentrate that has not been refined that treated on, I am sorry at Macraes. So gold production was strong at 71,000 ounce, gold solve at 56,000 ounces and the balance of that will be treating and selling through the first half of this year. Mining was obviously shut down the mining operation in the fourth quarter and good growth and throughput.

Nearly on the Macraes exploration on the Page 17, Coronation North has been quite a nice discovery for us, 3,000 once which also was announced in the fourth quarter and the drilling that you can in the top right hand table shows the additional drilling since that result was released. And extensional and infield drilling was in some nice looking grade there relatively shallow that. So the follow-up to that with continued focus on exploration to discovery more ounces along strike in the structure that is in the Macraes and mineralized, all about mineralization, some 25 kilometer long we find on a target code lost west where extensive soil sampling has been carried out and the picture on the bottom right hand corner shows you the heat meticulous for arsenic in the soil and that's indicated for gold a strong association between arsenic and gold in the Macraes areas.

So we'll be drilling there through the course of this year and hope to deliver some good results from there. The outlook from Macraes of course with rates in care and maintenance production will fall to around 140,000 ounces to 155,000 ounces, all-in sustaining costs slightly higher, 1,000 to 1,050 on the back of the lower production. We have hedged our gold production to 2016 and 2017. We are continuing to drill surface and underground with four rigs operating and progressing the Gold-Tungsten project and we'll finish that during the course of 2016 and stockpile also concentrates in Reefton are being treated that mill is now shutdown and but we'll be trading concentrated stockpiles over the next few months.

Moving on to Haile, and very good progress with the construction of Haile, construction as well underway as you can see from some of the photographs there and the exploration program has been commenced. We've commissioned the water treatment plant which was part of the permitting requirements with the regulator to have that up and running prior to construction of the nine plants and mine. The Ball and SAG mill foundations largely complete and we completed fairly certainly we expect to be erecting the steel on the process plant body in the first quarter.

Earthworks activity advancing very well, notwithstanding the fact we did have some heavy rain in the fourth quarter which was unseasonal. The Oceana construction teams have their hands on the wheel now, the team that managed to -- headed up the development of the Didipio operation and the investment in Haile, they are updating the designs and construction plans for the project and we'll provide the full update on the Haile project later in this quarter. Our Chief Development Officer, Mark Cadzow is now based in South Carolina along with Dave Bickerton who is the Vice President of project execution is also based there at the Haile project along with the number of other managers.

The Haile exploration, we've started the drilling to improve the confidence and increase the resource of the Horseshoe project, that drilling commenced in the fourth quarter of last year. Drilling at depth to provide an increase to that resource and also the planning's to do a PEI or scoping study in probably middle of this year. And we think that new drilling installation for the underground that is, and by the end of this year we would like to have a visibility study completed on an underground development at Haile ready for assessment. So, that's all looking pretty promising, the initial drilling was started at other regional targets at Cypress and Loblolly assays pending and additional targets have been identified and form the basis with the 2016 exploration program.

Page number 21, you're looking at an overview shot of the Haile site, you can see there's a lot of activity happening there, much of the column work which is again like the water treatment plant was required at the start of construction as part of the permitting requirements. Engineering is now 98% complete and procurement is about 80% complete, but that's two-thirds of the cost for the project have been committed and about one-third of the cost of the project has been spent. The internal study to identify further opportunities at Haile including the underground development it's underway. We've got 10,000 meters in this quarter planned at the Horseshoe drilling and an additional 20,000 meters more broadly this year. So, we've got full rigs operating and Haile right now. We are expecting First ore through the mill before the end of 2016 and commercial production early in 2017. So, I think we're tracking well at Haile and as I said we'll provide a full year's update on the Haile project later in this call.

So, I'd like to hand over to our CFO, Mark Chamberlain to give you an update on the financial performance, thanks, Mark.

Mark Chamberlain

Thanks, Mick. Coming to the Page 22, with this I've got summary of the start date to remind, remind you that despite the drop -- the substantial drop in the gold price was seeing from its high at 1,700 at the end of 2012 to the current lows, we have grown our revenues over that time and that’s because we are running a highly efficient business and in particular we put in place cost reduction practices at our higher cost operations. Just below that are the financial highlights, many of which we've already mentioned, but the annual dividend of $0.04 a share, so consistent with previous dividend in 2015, that'll be because we have almost double the number of that shares that will cost -- that'll be at the cost of $24 million. We’ve recently restructured our revolving credit facility in line with their requirements for the Haile project and I’ll discuss that a little bit more. As Mick mentioned, we’ve implemented the hedges since the end of the year about gold and oil and we’ve got slides for those for you.

Moving to the next slides where we set out our financial condition our liquidity part of liquidity from my understanding is 253 million of which 186 million in cash and we have 67 million undrawn on our current facility. Total debt is at 199 million and that’s an increase during the year as a result of us drawing down funds to the purchase Waihi. And as some of you may have understood when we invested in Romarco they have in place $200 million project facility we canceled that facility soon after taking control as it was expensive it had substantial test reserves tied up and probably more importantly it's limited our flexibility in developing the Haile project in the most important manner.

So we canceled that facility and instead replaced it with a slight increase in our revolving facility from 225 million to 250 million and otherwise we are relying on our cash and our income generated from the existing operations. That facility the restructured importantly is now fully used rather than a pre-tenant that we had been with previous facilities and reflects the confidence our banks have in us. It matures after two years it's a $50 million amortization after three years $50 million and then the final $150 million is paid again in December 19th. We also took the opportunity to negotiate a lower or substantially lower margin for the facility and a simple set of covenants going forward. So, funding is maturing as the Company is growing.

In the next box of the bottom there we set out the bankers with it which there are two new bankers in that group which is Scotia and the CBA and we welcome them to our group. Together with our traditional fund through BNP Paribas, Citi Bank, HSBC, and Natixis who joined us in the middle of 2015. As I mentioned this facility was used to fund the payment of the Waihi now Waihi is cost to round about 101 million but the cash we made was only 77 million because of the time we took ownership, legal ownership we have had economic exposure since the July 1st and from the July 1st through November that operation has generated some 24 million in cash flow over the last four months so that’s 6 million a month, so that help defer the payment required there.

Moving on the next slide we’ll set out the new hedging. As Mick mentioned 100% Macraes is now hedged for 2016 and ’17 better in line with our policy to ensure as that mine moves closer to its end of its life. We are not supporting it through cash flows from our other operations. We’ve used the same bridging technique as with on the pool that is costless columns where we buy puts and sell calls. On the first table the bottom to entries of the new ones and that is we topped up for the increased forecast production at Macraes from 26,000 ounces with a call up between 1,600 New Zealand and 1,800 and new hedging for 2017 of 155,000 ounces at a pool of 1,650 and a capital 1,810.

On the right hand side of the page we just mentioned the diesel we have taken the opportunity in this low environment cost environment for both crude and for the crack spread locking place 90% of their estimated diesel consumption over the next two years. This is showing that we’re managing our liquidity as we go through the five that are developing higher. Just a reminder that when we did that purchase from market they didn’t take in place hedges diesel hedges extending out to September 19, we cancelled both cases shortly after taking control they were at 209 cents we have in fact therefore reinstated hedges for ’16 and ’17 but they’re round about 120 since rather than the 210 we were seeing in the previous hedges. I am going to just point out just outside just public dividend paid on the Page 25 just turning out there to 24 million in the dividend and then with fee base below that the record in the March 1st with the dividend payment on April 29th and we will be paying dividend in U.S. dollar.

Moving to the next page, Page 27, where we set up the consolidated financial results and gold production in the last quarter was some 36% compared to quarter three or some 32,000 ounces, over the year it rose over 111,000 ounce and 36% again comparing 2014 to 2015. Copper was production slightly down for the year almost 2,000 ounces reflecting restaging of Didipio. This price received copper was down some 11% compared to -- sorry gold was 11% compared to 2014 and copper was down some 24%. Looking at the income statement, the revenues were down 55 million or 10% reflecting those lower commodity prices received, pleasingly despite the inclusion in the last stages of Waihi operating cost we saw a drop of $10 million almost in the operating cost. EBITDA for the year 193 million, depreciation and amortization slightly down 125 million from the previous year, financing cost about the same, earning before tax 56.5 million and net profit 53.1 million.

Moving to the next page where we got the cash flow summary. And opening cash balance was 51.2 million, we had a cash injection from the acquisition Romarco and operating cash inflows were 131 million, our investment for the year 125 million, so up some 15 million on the previous year. Financing inflows driven by the remarkable cash coming in $89 million to $90 million. So a net increase in cash over the year for 134 million with the closing balance of 185.5, I will suggest if you require more analysis of that it'd be worth looking at the consolidated cash lines which gives more details and also in the in particular cash flow where we discussed the acquisitions. On this information we have to expect that for 2015 and obviously the new information is the higher expenditures which we sent at last quarter so 32.6 million.

Hand it back to Mick to wrap it up.

Mick Wilkes

Thanks Mark. And I would point out next in profit statement we did have transaction costs of the full year some $8.5 million which reduced profits slightly. The outlook for 2016 is another solid year of production similar to last year certainly higher, 385,000 to 225,000 an ounce is our guidance with copper production down 10% and now 31,000 tons. And all the sustaining costs similar again to last year $700 to $750 per ounce and this is based on an exchange rate of $0.65 New Zealand to the U.S. dollar which is currently hovering around And the copper price was $2 a pound average for the full year. We expected we have some continued strong operations and production from all our operations with a good safety performance. The execution is higher obviously is a big factor for us this year and also the continued development of the Didipio underground such that, that underground operation at Didipio online in the end of 2017.

The exploration program across the U.S. and New Zealand and the Philippine has commenced so the year of the drill bit for OceanaGold would be spending some $30 million on exploration this year and predominately the U.S. and New Zealand and hopefully with permits pending in Philippine we can start doing some more explorations there as well. And in addition to that we're working on multiple feasibility studies for organic growth at all three of the non-Philippine operations with Haile of course under growing development at Haile, Waihi looking at mine extension both open pit and underground and of course the gold tungsten project at Macraes.

So that's it for me just a quick update on the upcoming events would be conference and we've got excited to have our first visit to Haile in March third and fourth resources and reserves updates in middle of about March and then slightly just to Didipio in New Zealand in April.

Thanks, I'll like to hand it back to Sam.

Sam Pazuki

Thank you, Mick and thank you Mark. I'll turn it over to the moderator to open up the line for questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Your first question comes from Benjamin Asuncion from Haywood Securities. Please go ahead.

Benjamin Asuncion

Just a few housekeeping issues to clarify, with regards to Haile can you walk through what the actual spend in 2015 was and then what you're looking at for in 2016 and potentially will it spill over into 2017?

Mick Wilkes

We expect this continuous expenditure this year at Haile, the capital costs are lot different from what's in the public domain currently, about two-thirds as I said earlier of the capital has been committed and so some $230 odd million and about one third or about $110 million, $120 million has been spent. So, we can expect around to $200 million spend on Haile this year. And as I said earlier we will provide a full update to the market later this quarter.

Benjamin Asuncion

And in regards to Macraes, can you give us a sense of what the head grade blended head grade profile would look like?

Mick Wilkes

I think it's about 1 gram I can’t tonne guaranteed that, that it's similar to last year. So, from the open pit and underground the blended head grade is about 1 gram.

Benjamin Asuncion

And just a last question here, in regards to looking at corporate G&A, backing out what the transaction costs were and can you give us a sense of what level you feel would be sustainable from a corporate G&A perspective per year?

Mick Wilkes

Total corporate G&A costs around 35 million, and that of course got some a lot of that development costs in there such as the project development team, the visibility starting to unlock. Mark do you want to add anything to that?

Mark Chamberlain

Yes, and that was going forward but not expecting a substantial in the G&A but that's about the figures we're about correct, about where we are looking down a little bit over the coming year, but pricing on high and largely the lower [indiscernible] size so right about I think 4 million on that.

Operator

Your next question comes from Michael Slifirski from Credit Suisse. Please go ahead.

Michael Slifirski

I think I've got two or three little questions first of all the cost performance at the Didipio I think you mentioned that inventory movements expand the hard cost on what you had budgeted, so I am interesting what sort of physically changed on site compared to your initial plan to drive that higher reported cost on inventory adjustments, what you did differently and why?

Mick Wilkes

The cost per ounce is actually higher than we expected last year, Didipio of course is some -- because of the inventory changes that the drivers in -- on the ground we did have higher cost per ounce for concentrate sells, some $30 per ounce, we did have higher capitalized mining cost of about $30 per ounce, so slightly higher, little waste mine last year and I guess that's what I meant by the inventory. We did have a higher G&A as a portion to Didipio relative to the other sites. And we've also slightly lower copper credit per ounce because of the lower copper production relative to gold production. So, if you like, a 127,000 ounces was above -- we exceeded on target but copper was within the target. So, the combination of all those relate to $130 an ounce, the reported difference.

Michael Slifirski

Secondly with respect to the oil hedging which looks terrific and very sensible, when you issued guidance for cost for Macraes, it was clearly before hedging does that change the cost projection for Macraes?

Mick Wilkes

For 2016?

Michael Slifirski

Yes.

Mick Wilkes

No, our forecast we used $30 a barrel.

Michael Slifirski

Okay, thank you.

Mick Wilkes

So, pretty much in line with what was yesterday.

Michael Slifirski

The non-cash paid accounting charges that we see intermediately, is there any way we can try and project those or are there any numbers we can look at from quarterly is that going to help us get that number right.

Mick Wilkes

I will say we are not, I think that has to be a full evaluation using option valuation techniques which takes in our account the volatility and that’s the hardest thing you’ve got to do. So we could have those though these consents dramatically depending on what volatility is at the end of the quarter. So much has got access to models option models that a bit higher to replicate.

Michael Slifirski

And finally can you help us a little bit again on some tax guidance P&L tax versus cash flow taxes something you will never get right. But just what you're broadly expecting for perhaps this year and next?

Mick Wilkes

Well, the DBAs you get your in light of business productions but other than that we have an income tax called away for six years from the commencement of production. I put that on to one side then the news here well no effective rates 28% at Waihi similar Macraes but at Macraes we have about tax losses that can be offset over the remaining period. So we’re really look at that the combination of business in light of taxes in the Philippines together with round about 28% would be the best at Waihi.

Mark Chamberlain

In Macraes tax losses is forecast to get over 30 which is up until 2019 and that…

Operator

Thank you. Your next question comes from Ovais Habib from Scotiabank. Please go ahead.

Ovais Habib

Congratulations on solid quarter on the year couple of questions from me starting from Didipio throughput hit record estimate about 3.6 million tons per annual I believe. Are you looking to push this further into 2016 or should we be maintaining this into our model going forward?

Mick Wilkes

It's actually question of rates we’re not post any meaningful capital at Didipio when the prices stop so whatever gains we get from here on is just improvements in productivity from efficiencies. So my guidance to you would be to model at that 0.9 -- 900,000 tons a quarter or 3.6 million tons a year going forward.

Ovais Habib

And then in regards to the grid power how is that availability been so far and how much the savings are you expecting would being linked to the grid power?

Mick Wilkes

The quality repair is actually being surprisingly good. So we are very pleased with that, we’ve had no downtime since we commissioned the power line back in December. But I’ll say that we did trepidation because we are in the winter month stage and traditionally have a lot of repair demand. And when summer hits and the air conditioner is turned on then it might have slightly different story. So we’ll have to wait and see through the course of the year how that goes there’s early indications are very positive. On the savings front the time the finishing of the power line almost particularly with the drop in the oil price so we’re probably not achieving this sort of savings that we were hoping at the moment and there is slight savings that have cost to payout at $100 a barrel with 2018 and obviously it’d be a lot less than that now as we were running the diesel generators. So, going forward our cost of power there is $0.48 a kilowatt hour.

Ovais Habib

And just moving on to Waihi I believe from what I understand the third quarter is expected to be the weakest quarter for 2016. Now is that due to lower grade or is that the money rates are coming down or can you give us more color on that?

Mick Wilkes

It's not mining rates it's just the price distribution in the ore body as you would understand you go through sequences, scoping through bottom up at Waihi and the grade currently are very good sitting here above 8 grams per tonne and then we start slightly lower through the course of the year. But in the third quarter they’re predicted to drop a little bit that’s simply a function of the price that there is no sort of mining ore basis other than we need to fill up the mill, so we’re going as hard as we can.

Ovais Habib

And just last question from me. In regards to the pit at Waihi I mean there were talks about doing some expansions there or push backs. Are you planning to release any sort of study there and maybe I missed it on the call.

Mick Wilkes

We are doing some drilling around the pit at the moment and so we’ve got four rigs at surface we’ll update the resource through the course of the first half of this year and then that including studies for the open pit in the second half of the year. We will release those when they're available there are of course you have to be careful with the information that we publish on this and we're optimistic that there is a lot of more life that I can put and currently foresee.

Operator

Thank you. Your next question comes from Michael Gray from Macquarie. Please go ahead.

Michael Gray

On Waihi you've mentioned cost reductions make presently is in connection with phasing out with contractor, can you give us an idea of timing whether we'll see these cost savings all in 2016 and any sense of scale?

Mick Wilkes

Working prices to be achieved this year and of course cost reductions and productivities with the mill operating on underground ore around of about 1 million tons a year and the mine going at around 600,000 tons. Any incremental improvement in productivity underground will reduce our cost base significantly, so it's with that any additional cost if we get, get the mining rate by 10% that goes straight to the bottom line. So that's a key focus for us in productivity but notwithstanding that there are numerous opportunities for efficiencies particularly in the underground mining you mentioned the contract there, so that work is those studies and those discussions are continuing. I expect that you should see some further reductions through the quarter this year into steady state of the end of the year.

Michael Gray

And you've highlighted new unnamed when discovery is that we see in near where you're currently mining or is that little bit further field?

Mick Wilkes

No, that's from underground zone so it's within that conflict that the main system in the underground drilling targets so it's near mine there.

Michael Gray

Okay and I want to clarify you said 34 kilometers planned for regional drilling as we also see results throughout the year on that drilling?

Mick Wilkes

Yes it's starting with WKC which is the lowest observation that came on system in that 10 kilometers to the north of Waihi so it's within tracking distance, it's growing existing results over the some 260,000 ounces with some pretty attractive minerals. There is actually a much larger resource there if you to mine from an open pit and the plan is to focus on underground development and track that down to the mine site, to the plant I should say. But that’s where a lot of those meters will be drilled then of course a number of other exploration and green field exploration targets in the region within 20 kilometers of the mine site.

Michael Gray

Okay final question on Macraes the lots weight target, it looks like there historic, some historic drilling on the bonanza 1 and 2 are some of those gold bearing documenting some gold kind of proved the arsenic is a pathfinder?

Mick Wilkes

We'll have to take question on lows but also I can't tell you and Sam will back to me. I know there has been some drilling there which is one of the reasons the target was developed in the first place, but this all favor is new information and it shows some it's highlighted by the strong number of surface. I should point out that Coronation mill had drilling 1 and 2 historical wells, so I mean sometimes you can miss these things by a few hindered meters and this one a whole. So I think it demonstrates that we have still opportunity in the products remembering that this is a structure that some 25 kilometers have striking and what we're trying to see on this is the shallower material where expression being past in the past and there has been some indication of gold. There are no promises yet but it's an interesting anomaly.

Operator

Thank you. Your next question comes from Chris Thompson from Raymond James. Please go ahead.

Chris Thompson

Just three quick questions, we'll start off with the Philippines obviously there is going to be an election, general election, I believe in May, can you just give us some I guess by way of the front runners and what they currently stand for as far as mining investment in that country?

Mick Wilkes

Yes, thanks Chris, a lot of political analyst that this pool presidential, serious presidential candidates they are up there in the polls Vice President, Binay the mayors of our city called is [indiscernible] a senator called [indiscernible] is running as an independent and [indiscernible] Rohr who's the liquid party candidate which is [indiscernible] government. Look it's pretty close, so both of them have a shot, at the price and the campaigning is done efficiently, [indiscernible] for the election mostly in May and we are working with, in the background to so let me call you later I'll try and understand the political radar. But in any types, we will see obviously words with any Presidential candidate that is successful. There are different views between different candidates that their approach to mine and I can say that broadly there is strong public support for responsible modern mining in the country as stated by the existing governments and all of the candidates how that plays out in practice independent or who's get's in the power. So, that's it, I think that is all I can say. And then we look forward to results.

Chris Thompson

Just moving on to Macraes quickly, I'm intrigued obviously you've got the Tungsten season already starting out there and then obviously you're getting a lot of success with Coronation North here, what seemed to play between the both these two opportunities I mean do you see obviously a move more towards the Coronation North and continuing to sort of push out that Tungsten opportunity as the Coronation North sort of matures?

Mick Wilkes

Yes, Coronation North is kind of one of -- one of the years of production and the price it's now planned to go to that 20 million team. With additional spend with additional further discoveries we'll extend that mine line further. So, I think the incremental additions to the current operation, it should be for the Tungsten project prove traceable and the technical it's looking fairly solid, then that's the long-term future for -- from Macraes basically, recapitalizing or redeveloping that operation and unlocking some 1.5 million to 1.8 million ounces of reserves. So, but there is we're not -- we haven't released the two as such, we'll get the feasibility study done and assess what the options are going forward, obviously Tungsten and the Tungsten project is the key driver, with the drop in oil price Tungsten is looking pretty unhealthy at the moment. So, we'll continue our discussions with potential off takers and long-term financing options for the redevelopment on the price. In parallel with further low cost exploration alongside for these ore body slight Coronation North to extend the mine life there.

Chris Thompson

And just finally very quickly just moving onto Waihi and just my understanding is we're expecting a revised reserved results if I guess next month, can you give us a sense of sort of drilling in amount of I guess meter-age from new drilling from current, that's going to be included in that estimate for that mine?

Mick Wilkes

Chris I have to get back to you on that, I can't give you an exact number, we've got seven drillings operating there, the results will be updated from the numbers of drilling, I think it was going back to that nine months, so have to get back to you, I don't exactly how many meters that represents naturally changing order like 10,000 meters to 20,000 meters.

Operator

Thank you. Your next question comes from Brett McKay from Deutsche Bank. Please go ahead.

Brett McKay

I just wanted to see if you could flush out what your plan is to get into the open pit at Waihi again [indiscernible] side there at the end of last year, there was a couple of different options, they considered, just wondering what you decided on and what the roughly economics are to extract that 65,000 additional ounces and how long it will take to win that -- those additional ounces?

Mick Wilkes

Yes, we have been [indiscernible] in access as we speak and down the Northwestern [indiscernible] of the pit so not in the vicinity in the localized [indiscernible] that happened in April last year. So we are coming at it from a different direction it's not a major CapEx it'll cost a couple of million dollars to develop that access but it won't give us light vehicle and truck access to the bottom as one line access to the bottom of the pit. We haven't yet determined how we would produce from those mines all from the bottom of the pit, but we're looking at options slightly in the second tunnel through the underground as a way to recover that ore. Obviously it’s just sitting there and relatively light cost recovery once you get access again. So we’re still looking at those options you could have see that we could start mining from the open pit again in 2017.

Brett McKay

On CapEx guidance for 2016, you’ve outlined some of the expenditure at Haile. Can you give us a number for the rest of the businesses over the course of the year particularly the expenditure acquired for Didipio underground?

Mick Wilkes

The underground is that 45 million this year so great capital expenditure in the order of $50 million this year, sustained capital is around 10 million at Didipio, Waihi I think it's about $10 million of sustaining capital there but the expressions being around 10 million and the price I’ll have to get back to you on what depreciation and expenditures.

Brett McKay

Is that price stripped in the all-in sustaining cost guidance for Macraes?

Mick Wilkes

Yes, it is. It is all of their mining costs of Macraes are in the all-in sustaining cost [Multiple Speakers].

Brett McKay

Really anything that sits outside of the all in sustaining cost guidance?

Mick Wilkes

The underground mine at Didipio the Haile mine and there is some Greenfield exploration that’s in -- that’s not in the all-in sustaining cost what we call Greenfields is -- I’ve just got the numbers in front me now the split between sustaining and non-sustaining exploration is around 50-50 so it's about 15 million of exploration expenditure which is not in the sustaining capital, it is Greenfields exploration.

Brett McKay

And just finally are you able to disclose what is the TCRCs you said at Didipio for the year?

Mick Wilkes

We can’t say that exactly though it's contractually bound to the confidentiality is that information but the benchmark right is being set for the year they’re around 99.

Operator

Thank you. Your next question comes from Reg Spencer from Canaccord. Please go ahead.

Reg Spencer

My question was actually on the grid power at Didipio and they tried off with what’s happening with those in all process but you’ve actually answered that question and I couldn’t see I had to remove myself from the queue. So, apologies guys, but that’s it from me.

Mick Wilkes

Thanks Reg. Good to hear from you.

Operator

Thank you [Operator Instructions]. Your next question comes from Jeff Killeen from CIBC. Please go ahead.

Jeff Killeen

My question really just comes around timing for both Macraes and Waihi. Thinking about what the current reserves look like knowing that there is an update coming thinking about doing scoping work through the second half, do you think you have enough time in order to complete that work before you chose through the current reserves at both Macraes and Waihi and can you avoid the cessation at those two operations or do you think that that’s eminent?

Mick Wilkes

Well, we’ve got 3 years at Waihi currently planned and we’ve got four years at Macraes currently planned in the finances, so with further exploration minimum is to replenish each year -- depleted reserves each year. So, in terms of any other options doing an open pit at extension at Waihi we don’t know exactly how long that will take, it could mean if we run successfully further exploration success for underground development at Waihi which I think is the mine likelihood then there could be a cessation in 3 years time but if we assume that it will take after five years to redevelop that open pit then there is a possibility but I am pretty confident that we would buy the extensions to keep that up to the current mining reserves to keep that underground going and I’ll point to the history of successful exploration at Waihi over the past 10 years discovering additional ore bodies it's a very extensive mineralized system we’re looking at things like mining narrow veins as well as the thicker ones some it hasn’t been done before.

We’re looking at proving up these resource north of the Waihi and [indiscernible] which could add additional mine life and subject to permit and there is many options as far as at Waihi and we're working had to unlock those. But short answer to your question on Waihi there is a possibility I'd say recession that does not diminish the value very much of the business. And in Macraes again same story if we continue to have success with exploration we keep it going, if we didn't then we put it care and maintenance and look any options for the development of the tungsten project, the gold has the project independently, so it's going to add driver to necessarily maintain continuous operations, we have to look these things with very focused on what creates this value for the business.

Operator

Thank you. There are no more questions at this time, please proceed.

Sam Pazuki

Well, that concludes the presentation for today. On behalf of the rest of the team at OceanaGold, I would like to thank you for your interest and participation. And should you have further questions, please contact the company directly. Bye for now.

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