Goldcorp's (GG) CEO David Garofalo on Q1 2016 Results - Earnings Call Transcript

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Goldcorp Inc. (NYSE:GG)

Q1 2016 Results Earnings Conference Call

April 28, 2016 01:00 PM ET

Executives

Lynette Gould - Director, IR

David Garofalo - President and CEO

George Burns - EVP and COO

Russell Ball - EVP and CFO

Analysts

Andrew Quail - Goldman Sachs

Anita Soni - Credit Suisse

Tony Lesiak - Canaccord Genuity

Greg Barnes - TD Securities

Andrew Kaip - BMO

David Haughton - CIBC

Botir Sharipov - HSBC

Stephen Walker - RBC Capital Markets

Mike Parkin - Desjardins

Jorge Beristain - Deutsche Bank

Operator

Good morning, ladies and gentlemen. Welcome to the Goldcorp Inc. Q1 2016 Results Conference Call. Please be advised that this call is being recorded.

I would now like to turn the meeting over to Ms. Lynette Gould, Director, Investor Relations of Goldcorp. Please go ahead, Ms. Gould.

Lynette Gould

Thank you, operator. And welcome to the Goldcorp first quarter 2016 conference call. Our presenter today is David Garofalo, Goldcorp’s President and Chief Executive Officer. Accompanying David for the Q&A portion of the call will be George Burns, Executive Vice President and Chief Operating Officer; and Russell Ball, Executive Vice President and Chief Financial Officer.

For those of you participating on the webcast, we have included a number of slides to support today’s discussion. These slides are available on our website at www.goldcorp.com. As a reminder, comments made on today’s call may contain forward-looking information and this information by its nature is subject to risks and uncertainties and as such, actual results may differ materially from the views expressed today. For further information on these risks and uncertainties, please consult the Company’s relevant filings on SEDAR and EDGAR. These documents are also available on our website.

With that, I will now turn the call over to David Garofalo. Dave?

David Garofalo

Thanks, Lynette. Good morning, everyone. And thanks for joining us today. With the ramp up continuing to advance at both Cerro Negro and Eleonore, solid performances across our portfolio of assets, we delivered sound financial and operational results in the first quarter with production of 783,700 gold ounces at all-in sustaining cost of $836 per ounce. This solid start to production in the first quarter allows us to reconfirm our full-year production and cost guidance of 2.8 million to 3.1 million ounces at all-in sustaining costs of $850 to $925 per ounce. The studies underway at our organic projects continued to progress during the quarter and play an integral part in our focus to drive efficiency and productivity improvements throughout the organization.

In addition, we are targeting $250 million in sustainable annual efficiencies as we continue to find ways to harvest maximum returns from our large capital investment which we completed last year. Production this quarter was up 8% over the first quarter of 2015 reflecting the benefit of a full quarter of production from Cerro Negro and Eleonore, each of which achieved commercial production last year. The decrease in gold production from that reported in the fourth quarter of 2015 reflects the impact of the planned lower mine grade, a scheduled maintenance at Penasquito, and the stockpile depletions at the end of 2015 at Cerro Negro and Eleonore. Adjusted cash flows from operations were $330 million or $0.40 per share compared to $366 million.

The 6% decrease in unit operating costs largely offset a decrease of a little over 3% in gold ounces sold as the overall cash profit from our mines was essentially unchanged. The decrease in adjusted cash flows from operations was primarily a result of restructuring costs in the first quarter of 2016 relating to the various initiatives to improve efficiencies at the mine sites and corporate offices. The decrease in unit operating costs in the first quarter reflects the economies of scale from our gold production increase, but also the early results of the launch of a two-year program to deliver sustainable efficiencies in our business of $250 million per annum. We have initiated the process of decentralizing the organization driving ownership and accountability down to the individual mine sites in order to grow the net asset value of our business.

In the first quarter alone, we eliminated 750 positions in our Canadian business and announced the closure of our exploration offices in Reno, Nevada and Durango, Mexico. Further significant efficiencies are expected over the next two years as we right-size the organization to reflect the transition from major construction, to harvesting a return from our mines, drive down input costs, and further decentralized responsibilities to our mine sites. Net earnings were $80 million or $0.10 per share in the first quarter of 2016 compared to a net loss of $87 million or $0.11 per share in the first quarter of 2015. GAAP net earnings were positively impacted by lower depreciation and depletion expense and a non-cash accounting income tax recovery, partially offset by the restructuring charges.

At March 31, our total liquidity was approximately $3.2 billion including approximately $500 million in cash and cash equivalent and $2.7 billion available under our credit facility. While the Company generated negative free cash flow of $101 million in the first quarter of 2016 compared to negative $321 million in 2015, we are expected to be substantially free cash flow positive over the full year in 2016. As was the case in 2015, first quarter free cash flow was depressed due to normal seasonal working capital build up, which is not expected to recur over the balance of the year. At $1,200 per ounce gold, we’re expected to generate over $400 million of free cash flow in 2016 and every $100 increase in the gold price would add approximately $300 million to that amount.

This cash return from our strong portfolio of low cost mines is expected to be used to repay debt maturities of $200 million due this year and a further $500 million due in 2018. At current gold prices, we will have more than sufficient cash flow to fund these debt repayments, invest in our organic growth projects, and continue to pay our current sustainable dividend. This will only further improve the competitive advantage we enjoy in the gold sector where we have the peer leading balance sheet. One of our key priorities this year is to deliver on our guidance. With the first quarter completed, we are reconfirming our 2016 gold production range between 2.8 million ounces to 3.1 million ounces and remain comfortable with production at approximately 3 million ounces per annum over the next several years.

However, as budgeted, quarterly production will show some variation. In the second quarter we will experience planned lower mining grade sequences in most mines, a 10-day shutdown for preventative maintenance at Penasquito, and over two weeks of planned maintenance at two of the four outer plays at Pueblo Viejo. As a result, second quarter gold production is expected to decline by approximately 15% compared to the first quarter, but is projected to improve in the third and fourth quarters of 2016 as Penasquito’s planned maintenance is now complete and mining grades across our portfolio of mines are projected to increase somewhat through normal mining sequence. Our all-in sustaining will increase in the second quarter as a result of lower gold production at a time they’re sustaining capital expenditures. However, we remain on track to meet our full-year AISC guidance range, which is between $850 and $925 per ounce.

Turning to our operations, at Penasquito lower grade was expected and will process as I mentioned through this year and over the next couple of years. This year the average grade is forecast to be approximately 0.7 grams per tonne further decreasing to approximately 0.5 grams per tonne in 2017 and 2018. In 2019 the grade is planned to increase to above 0.7 grams per tonne, at which point we expect the production profile will further benefit from higher recoveries from the potential Pyrite Leach plant investment, which I will discuss further in a moment. We also signed a long-term agreement with the Matamoros Ejido at the end of the first quarter for land required in the Northern Well Field project.

The project is on track to be completed late this year providing us the water requirements needed at site for the long term. At Cerro Negro, mine management is focused on optimal mine design. They are currently working on a pre-feasibility study that is expected to be completed by the end of 2016 for additional veins at the Marianas complex. The short-term plan is to enable ore production from Marianas Norte in 2017 to add to the current production from Marianas Central and Eureka underground mines. We’ve also realized some benefits from the new government’s initiatives to open up the Argentinian economy including the devaluation of local currency, the lifting of import restrictions, and the removal of certain taxes; all of which contributed to improvements in the economics of the mine.

At Eleonore, we continue to see improvements in the mine performance, recovery improvements with the result of optimization of the stockpile circuit and an average recovery of 91% was achieved in March. With the folding and faulting of the ore body factored into the mine plan and accounted for in the improved stoke designs valuation during the quarter met our expectations. As the stockpiles were depleted at the end of last year, the site team is focused on ramping up the underground development and are on track to average 4,900 tonnes of ore per day in 2016 with full production of 7,000 tonnes per day still expected in the first half of 2018 as we bring on two more mining horizons to supplement ore production from the four existing ones.

The production shaft is advancing and is expected to be completed by the end of the year driving further improvements in efficiencies and costs. At Red Lake, optimization of the camp is underway. We are seeing the benefits already in the conversion of bulk mining with improved mining efficiencies and operating costs. These improvements were offset by planned lower grades due to lower tonnes from the high grade zone. However, with trade-off studies advancing on the rationalization of excess infrastructure, we expect to further reduce our costs. At Porcupine, substantially improved gold production and cost performance reflected the ramp up of production from the Hollinger pit to 24 hour per day mining and the drawdown of in-circuit inventory.

On the project pipeline, we have completed the Hoyle Deep project, which is now a new underground winze. Full commissioning and hand over to the operations team was completed in April. The completion of the winze will allow more efficient movement of personnel and material to the lower levels of the mine. The new winze will also increase the hoisting capacity of ore and waste. At Penasquito, the Pyrite Leach feasibility study is advancing and investment decision is expected mid-year. As we approach the completion of detailed engineering, we’ll provide tentative project economics with the release of our second quarter results in July. Assuming a positive investment decision, it is expected to be in production in the first quarter of 2019.

The feasibility study of the materials handling project in Musselwhite continues to advance towards completion by mid-year. If approved, we expect to have it in operation by the end of 2018. This project has the potential to expand and extend the underground mine life at Musselwhite, increase annual production, decrease operating costs, and improve safety by shortening the underground haul distance through installing an internal winze.

In the Red Lake camp at HG Young, the concept study is on track to be completed by year-end and assuming a positive business case and exploration results, we expect to commence a pre-feasibility study in the first half of 2017. Exploration continues to be focused on the evaluation of development options from the underground for the core area of the high grade defined to date.

At Cochenour, drilling continues in the core area of the deposit to increase data density and improve the understanding of projections and orientations of mineralization. Preparations are advancing towards development of two sills later this year. A sampling program has been developed that will enable reconciliation with the mine material and validated using a sampling tower. The new program of drilling, sampling, and test mining is expected to be designed by the middle of 2016. At Camino Rojo, the pre-feasibility study in the Oxide is underway and we expect to complete it by year-end. The pre-feasibility study is advancing at Borden with completion expected in the first quarter of 2017. Exploration is currently focused on the discovery of additional resources along strike from the known Borden deposit and evaluation of the large regional land package.

An advanced exploration permit is expected by late 2016, which would allow for the construction of a ramp into the deposit and extraction of a 30,000 ton bulk sample. At Goldcorp, our business decisions will be driven by what maximizes and grows the net asset value per share of our Company rather than adding unprofitable ounces to the production profile for the sake of production growth. We intend to enhance the returns from our high quality asset base through the continued decentralization of responsibilities and accountability to our mine site businesses. In doing so, we believe we can achieve sustainable efficiencies of $250 million per annum by 2018. We also intend to reinvest our free cash flow into a robust pipeline of internal projects within the five prolific mining camps we control in low political risk jurisdictions.

These opportunities have several distinct advantages. We already own them, they leverage our existing infrastructure and people, are low in capital intensity, and can be easily financed internally. For all those reasons, they have the potential for high rates of return, which will contribute to net asset value per share growth. Finally, we are helping to cultivate the next generation of large scale gold deposits by putting small C-capital investments to work with multiple junior companies. We believe this diversifies exploration risk and leverages scarce exploration dollars in promising geological trends.

Operator, at this point, we’d be happy to take questions.

Question-and-Answer Session

Operator

[Operator Instructions] The first question is from Andrew Quail of Goldman Sachs. Please go ahead.

Andrew Quail

Thanks guys and thanks for the update, congratulations on a strong quarter first up. Couple of questions, first on the DD&A, obviously your annual guidance of $390 to $420 an ounce, you came in around sort of a more of a $345 with your $271 million. Is that something that ramps up in Q2 or is that something that the guidance needs revising?

Russell Ball

Andrew, it’s Russ. That really will follow the sales volume at the end of the day so you should expect to see lower DD&A in total in the second quarter as we have lower sales volume and then you’ll see it ramping up towards the end of the year.

Andrew Quail

And for Q1 it was just low? I mean, it just seems like a little bit?

Russell Ball

First quarter of ‘15 it was lower. You remember we had inventory at Cerro Negro that we sold first quarter of ‘15 so that DD&A went with it.

Andrew Quail

Okay. Second question is when you guys talk about next quarter obviously being well above 15%. Those lower grade mining sequences, is that including Eleonore and Cerro Negro?

George Burns


Actually no. Cerro Negro and Eleonore aren’t a significant factor in that lower quarter. It’s really largely driven by Penasquito and our plant shutdown that’s already complete as well as we have two autoclaves down at Pueblo Viejo in one quarter. Those are the two key drivers and then just lower grades across the rest of the portfolio.

Andrew Quail

Thanks, George. That’s helpful. Thanks guys for the update.

Operator

Thank you, the following question is from Anita Soni of Credit Suisse. Please go ahead.

Anita Soni

Good afternoon everyone. Dave, could you just give us some thoughts on where you will be targeting that $250 million reduction per annum? And just to clarify for me is that $250 million each year in 2016 and 2017 or is that $250 million over the course of the two years?

David Garofalo

I’ll let George talk to some of the areas we’re targeting, but the $250 million is expected to be sustainable annual savings starting by 2018 is when we expect achieve that fully. But George, do you want to talk to some of the areas we’re focusing on?

George Burns

Sure, I mean an obvious one is overall manpower. So, we’ve already implemented improvements in our Canadian business in some of our G&A and there’s further work to be done. Our Latin American mines are roughly two-thirds of our total workforce so we have a heavy focus on improving efficiencies and productivities there to get costs down. And really it’s focused on our operating for excellence programs to find all opportunities possible to improve cash flow. So we’ve made progress already, some of that was built into this year’s plan, but we’re seeing even further opportunities. Automation is another thing we’re focused pretty heavily on. As you know, we have a lot of underground mining in our Company. We’ve got two brand new mines and we’re leveraging the ability to automate and as Eleonore continues to ramp up and we get the infrastructure completed, that’s going to help us; in Cerro Negro, same sort of story, we’re putting in technology and moving towards automation so that’s going to help us both on productivity efficiencies and cost reductions.

Russell Ball

Anita, Russ. I’d just add that 250 million will be across the entire business. We’re looking not only in the operating side; sustaining capital, new projects; so it is really holistic view across the entire business including corporate G&A.

Anita Soni

Okay. And just to clarify the 250 million over the course of two years, right?

Russell Ball

No. 250 million run rate beginning 2018 so we’ll be ramping up between now and then to that number. As George said, some have started, but you should plan on a run rate of 250 million beginning in 2018 year.

Anita Soni

And then let me just moved to a question with regards to Cerro Negro’s throughput. I think in the guidance that you provided earlier in the year it was about 3,500 tonnes per day was the throughput level and I think we were running just above 3,000 tonnes or 3,100 tonnes in Q1. Is that going to be a steady ramp? I think you guys talked about development work being one of the pinch points there. Could you just give us some clarity on how that’s going progress throughout the year?

George Burns

I mean comparing to last year, we did about 3,400 tonne a day at Cerro Negro and of that, about 2,200 tonne a day came out of the underground and roughly 1,200 came out of stockpile. So, about two-thirds from the mine, stockpiles are gone this year at Cerro Negro so it’s really mine to mill and our plan for the year is to have a run rate of about 3,300 tonne per day out of the two underground. So for the year, that’s about a 50% increase in mine production rates and it’s going to fluctuate a bit quarter-to-quarter depending on where we’re at on development. During Q1 we saw a pretty significant ramp up in tonnage coming out of Mariana Central, that’s our higher grade of the two mines and it got a significant focus. So, again we’re comfortable for the year we’ll hit that overall throughput rate of about 3,500 tonnes a day for the year.

Anita Soni

And then last question pertains to Cochenour. Could you just alienate again what are the next steps for Cochenour and what the main issue was there with the asset? I’m just a little confused as to the bottom half of the mine, what you’re trying to look at in terms of what you’re trying to target in terms of the drilling there?

George Burns

So, right now the bottom portion of the deposit’s not the focal point. We’re up sort of in the heart of the deposit and essentially we’ve got drilling confirming results consistent with our modeling. We have put some horizontal holes right down the first sill level that we plan to develop and those results look good. We are constructing a sample tower that will be used on surface, it’s expected to be available in June. And what will happen then we’ll drive the first sill right down those horizontal holes that we drill and every round will be hoisted and run through a sample tower. What we’ll be able to do then is to compare the cross-sectional drill results with the longitudinal drill holes that went right down the still level against a round by round really good sample.

And so our plan is to get two of those done this year, two sills completed. We’ll be able to compare all that data, confirm our sampling methods, and with that sort of work we’ll be able to then project what the future holds. Ideally next steps would mean test dope that again would confirm correlation from sill data and drilling infill detail, stoke drilling to what we get out of that initial test dope. And so we’re just building our knowledge base around that central part of the deposit and I would tell you expect us to have a more wholesome plan of what Cochenour means to us around the end of the year as we complete our budgets and complete all this development work.

Operator

Thank you. The following question is from Tony Lesiak of Canaccord Genuity. Please go ahead.

Tony Lesiak

I have a question on unit costs. They were down materially number your key assets. Question for George, what’s the potential here for further unit cost improvements? Can you give us a sense of further cost reductions at each of your core assets thinking more in percentage, really trying to get a sense here of longer term target run rates?

George Burns

I can talk to this globally. This $250 million improvement by 2018 is a key focus for every one of our sites and so we’re looking for those efficiencies. Labor productivity efficiencies we’ve made good progress, but there is additional opportunity we’re driving on it. If you take Penasquito as maybe an example, we’ve got over 70 haul trucks running at Penasquito. So some of the things we’re looking at is improved dispatch efficiency, improving roads, we’re looking at futuristic projects like trolley assist that can improve productivity. So, there are some things that are underway and we’re seeing improvements. There’s other that are conceptual like trolley assist that could add some benefits into the future. I don’t want to get too specific in terms of trying to lay out mine by mine what we’re doing, but I can tell you I’m highly confident that we’re going to achieve that $250 million and a good portion of it is going to come out of unit cost reductions at our operating mines.

Tony Lesiak

George, I mean if you look at some of the key assets, if you look at Cerro Negro if I recall the feasibility study and being on site, the opportunity was to take unit cost down I think it was in the magnitude like another 30% or 40%. Do you still see that as being possible?

George Burns

Yes, I do. We’ve got the exchange rate that’s helped us in Argentina that’s pretty significant and we’re optimistic about the future in that term. Second, we’re deploying automation and we’re really optimistic about that. We’ve got a mining fleet capable of not only semi automation, but full automation and that’s going to be a couple of year ramp up in tackling that technology, but it’s a game changer. We’re in the process of developing Marianas Norte so we’d have a third underground mine. We’ve had good exploration success around the Mariana complex and so we’ve got a team that’s going to be looking at opportunities to improve the mine plan around that complex and it provides synergy so additional access points debottlenecking traffic as a result of that. And the last thing I’d say about Cerro Negro is G&A costs are very high and we’re in the midst of restructuring that business unit and driving our G&A cost down significantly. So yes, that 30% I think is an achievable number and it will be part of the story on this $250 million in annual improvements in cash flow by 2018.

Russell Ball

Tony, it’s Russ. Just adding to that, the $250 million represents roughly 8.5% of controllable spend. So if you apply that to the all in sustaining cost guidance range, you’ll get an indication of what we expect to see globally given that bulk of the spending is in net all in sustaining cost number.

Tony Lesiak

Finally just on the project pipeline and maybe a question for Dave or Russ. At current gold prices, do you feel that you’re in a position to fund all these opportunities?

David Garofalo

Absolutely. I mean we’re generating at current gold prices, north of $400 million a year of free cash flow from the existing production profile and with natural maturities in debt, that’ll consume about $700 million of that over the next three years. That leaves us more than enough to pay the dividends and fund these projects internally. The most significant project from a capital intensity standpoint will be Pyrite Leach and as you saw in our technical report, we expect that to be in the $400 million to $420 million range. The rest of these projects are quite small in the grand scheme of things.

Russell Ball

Tony, Russ. Maybe just adding because it speaks into that. You obviously saw the working capital increase this quarter. This was almost entirely related to Penasquito where we had an increase in concentrate receivables for a couple of shipments that went out at quarter end of about 126 million and we also reduced accounts payable and made some tax payments at Penasquito which reduced or required an additional source of capital of $54 million. So you saw the negative free cash flow for the quarter, but it was really driven by some timing around those payments and we fully expect that to turnaround. And as Dave said, at these numbers you saw the slide earlier, we’re north of $400 million. So, we feel very comfortable that yes, we can continue to fund these and at the same time deleverage the balance sheet and pay that dividend.

Operator

Thank you. The following question is from Greg Barnes of TD Securities. Please go ahead.

Greg Barnes

Dave and or George, I just want to get a better feel for Red Lake and where you see it going over the next five years. I know you working on HG Young and Cochenour, but you’ve got a lot of infrastructure there. Dave, can you talk about rationalizing that? How do you see all this coming together?

George Burns

George here. So, there’s a couple of things happened at Red Lake. We have the growth opportunities around HG Young and Cochenour that will play out. We’re focused on more bulk mining at Red Lake. We’ve seen good progress with that over the last six months and there’s more to come. An example of that on the Red Lake side of the camp, the old Number 1 shaft was used to hoist ore for the upper Red Lake. What we have now, we have ore passes that we can drop the ore down in the Number 3 shaft, which is the new shaft at the complex. And so, we converted the bulk mining in the upper Red Lake versus old Jackleg mining narrow vein and in those efficiencies, we’ll build into the future. We’re just ramping that up as we speak. So, the way I look at it, we’re transitioning from higher cost more manual mining to bulk mining in the bulk of the Red Lake camp. The infrastructure getting rid of one shaft is step one, we have another redundant shaft that will be in the plans to be pulled out. And the other thing about the Red Lake camp, we’ve got two mills that are part of the history and we’ve got a project that we’re working on this year that will kind of combine the assets of those two mills into a one mill operation that will be more efficient and lower cost. So, we are making pretty good progress and I’m still excited about the exploration potential on those two projects. We just need to be patient and as we’ve stated when we have reserves, they’ll be in our production plans.

Greg Barnes

So George, historically or recently this has been a 500,000 ounce a year mine. Do you still see that as being the potential in Red Lake or are we somewhere lower than that going forward?

George Burns

It’s all going to be dependent on how successful we are with HG Young and Cochenour. I would tell you that’s possible, but we got to stay tuned and see how these two exploration projects unfold.

Greg Barnes

And just on HG Young, Dave ran through the process there pretty quick so I just wanted to run through that again so I get a better idea of how that’s going to proceed.

George Burns

So for HG Young, we are in advanced exploration there. This year our focus is looking at development opportunities for the upper part of the deposit and then exploration strategies to chase it at depth. So, this year is all about developing plans on how we exploit that deposit.

Greg Barnes

So there’s a concept for this year, pre-feas next year, right?

George Burns

Yes.

Greg Barnes

Then what?

David Garofalo

Then we will let you know. One step at a time, Greg. We’ll get the pre-feas done and then if it’s positive, then we will move obviously to the feasibility stage. And as I think I’ve said before, we don’t want to get ahead of ourselves with any of these projects. We’ll tell you about the next critical milestone when we achieve that. We’ll lay up the next milestone after that. Ultimately what we want to avoid is putting ounces into the production profile without a properly engineered block model. So, we’re going to take this in a very systematic way.

Operator

The following question is from Andrew Kaip of BMO. Please go ahead.

Andrew Kaip

Good afternoon, look I’ve just got a couple of questions. Just firstly on the restructuring costs. Can you give us a sense of what kind of restructuring costs we should be anticipating as you embark upon this cost optimization program?

Russell Ball

Andrew, it’s Russ. You saw for the first quarter we had $23 million that was largely Red Lake and corporate. We don’t have a line item as we’re still working through that process, but I wouldn’t expect anything too different for at least the next couple of quarters. I believe we’ll be somewhere in that same neighborhood as we work through the optimization efforts that we discussed earlier. So, call it $20 million to $25 million a quarter is a place holder for now.

Andrew Kaip

Okay. And do you think that that process is going to be complete by year-end or will it continue into 2017?

Russell Ball

No, I think it will spill into 2017. Whether the restructuring costs are completed this year or next year will be a function of the work as we go through it. We generally look at those costs as non-recurring in nature just given the upfront costs related to that and generally we see a payback of less than a year on those restructuring costs.

Andrew Kaip

Okay. And then with respect to that $250 million target, I’m wondering if you can just on a high level basis give us a sense of how it might breakdown between what percentage of those savings would be achieved on operating costs versus sustaining capital versus G&A? Do you have that ability to talk to us sort of on a percentage basis?

Russell Ball

Andrew, we have an idea but as Dave said, we haven’t done enough work to be able to give you that level of specificity. I would go with the 8.5% across the board for now and when we have better ideas of where those numbers are, we’ll tell you. But the bulk of the dollars are in that all-in sustaining number and I would just apportion the 8.5% across the board for now.

Andrew Kaip

Okay. And then George, this is maybe a question for you and it’s a follow-up on discussions on Red Lake. It strikes me that the HG Young zone was a previously known zone that was then revisited and has led to the success that you have had over the last 12 to 18 months. I’m wondering if there is a more fulsome review of the potential of the Red Lake camp that is going on right now and are there any other targets that are early stage, but looking like they might be promising?

George Burns

You’re right, HG Young there was a shaft and a historic mine there. The HG Young project that we’re working on was our geologist taking a look at the structures in the district and how they apply to the HG Young area and essentially it was intersection of various structures that we focused on and the exploration drilling on those intersections resulted in that discovery. And yes, we’re applying that same logic fresh eyes first thinking across the district we do have other targets that we’ll be following up on.

Operator

Thank you. The following question is from David Haughton of CIBC. Please go ahead.

David Haughton

Back to Argentina, things have taken a pretty good turn down there with relaxation of exchange control, pace of importation, et cetera. Wondering if any of those numbers are factored into your current guidance?

Russell Ball

Dave, it’s Russ, I’ll take that one. Yes, certainly the last four months in Argentina have been a significant positive for the mine as we alluded to earlier. The most relevant to immediate cash flow is the 5% tax on exports, which has been repealed. The other significant positive for us is the ability to import spares and the ability to use capital to bring in parts and supplies, which the supply chain is still working through the details of that but we look at it extremely positively. The devaluation certainly was significant in the first quarter, but we have seen the peso strengthen of late as the Argentinean Government has been able to go out and access the capital markets so from our perspective, hats off to the Macri government.

I’ll actually be down there in a couple weeks as we work through some of our capital structure down there, but it is certainly a significant positive for us and we do have a tailwind that some of its reflected in our numbers Dave, but not all of it and a big variable is what that exchange rate does. You might know that at the end of June the currency controls will be fully lifted and so there is different view on what the exchange may do at the end of June. But from a macro perspective, significant tailwinds, we’re working through the labor related issues with the workforce reduction that George alluded to earlier and that will play out over the next couple of quarters. But for us, significant positive tailwind down there and we’re looking forward to seeing that mine deliver.

David Haughton

And on the labor front, Russell, have you had any liberalization at the face kind of time with the unions? I understood it was only six hours of underground mining, have you had any headway on improving that?

George Burns

We haven’t, I mean, we’ve built some efficiencies in and just the way we approach the shift and spread our people out. No improvement yet. But the one thing I would point out from a labor perspective and we are looking at efficiencies and improvements that will reduce our cost. We’re focused on ramping up the skill level of our Argentine local workforce. We’re very optimistic and we’ve seen good progress on that and that reduces our reliance on expats and higher cost labor. So, that will be part of the efficiencies and we’re looking forward to having a much more local workforce that’s lower cost and highly productive.

David Garofalo

David, I just wanted to add that the restrictions on underground shift dates back to on the books from the 1920s. And Ian and I met with President Macri a couple of weeks ago and made him aware of how that was undermining our productivity at the mine and emphasized that this mine which is similar in scale to Musselwhite is operating with about three times the workforce. And he was very, very interested in the lack of productivity and the impediments to achieving productivity we’re accustomed to in our North American operations.

David Haughton

And Dave, from that meeting, do you get the sense that the country is open for business for miners?

David Garofalo

Yes. We met with the Minister of Interior, Minister of Energy, Minister of Mines, and the President, his National Advisor in foreign direct investment and it’s an Ivy League group. I mean they’re very, very sophisticated and understand the challenges they’re facing on productivity within the country and they’re topping it head on. So I was very, very encouraged out of that meeting.

David Haughton

Okay, sounds good. Just something a little bit more mundane I’m afraid from Argentina. Russ, you’ve been talking about the working cap and obviously there’s that big working cap adjustment in the quarter. Do you expect any of that to unwind in the next couple quarters?

Russell Ball

Yes, absolutely. We have actually you will have seen a 250 million draw on the revolver at the end of the quarter, that’s down to 135 million today and we have to have that paid off here shortly. And as Dave said, the focus is on that $200 million in Argentina debt sure dated and then the 500 million due in 2018 that we look to de-lever the balance sheet. So, it clearly is a timing issue. We could have accelerated the receivable on the 100 million, I think 175 million odd that’s receivable at Penasquito, but it didn’t make any economic sense. We’ll see it this quarter and we’ll move on.

David Haughton

And one last one for me probably for George, just for us to get an idea of the quantum of the maintenance at Penasquito in the current quarter, would we be looking at a throughout rate lower than what we had seen in the first quarter like below 100,000 tonnes per day if you average it out for the entire period?

George Burns

It was a 10 day shutdown, it’s completed. So, that was an abnormal shutdown. We did some major modifications and repairs to the main conveyor between the primary crusher and the mill, crusher maintenance and replaced the head on one of the ball mills were the significant things so that that will impact throughput for the quarter. But I’m also expecting to see a ramp up happen in the back half of the second quarter. So, I don’t think it will be much different than Q1 in spite of that downtime.

David Haughton

Okay. So ramp up in relation to throughput and ore grade?

George Burns

Correct, throughput. Not grade, throughput.

David Haughton

Great. Thank you very much, guys.

Operator

Thank you. The following question is from Botir Sharipov of HSBC. Please go ahead.

Botir Sharipov

Congrats on the solid quarter. Can you possibly give us an update on what you guys are going to do with Porcupine overcapacity in second half with Borden on the ground and [Indiscernible] pretty much out of the equation by the midyear?

George Burns

The mill will not be full so we’ll be looking to optimize efficiency through the mill. We actually have a couple of different circuits and so we can match milling capacity with various throughputs as that transition unfolds.

Botir Sharipov

And the new shaft that you commissioned there, how do you expect it to help you may be offset a potential increase in cost there?

George Burns

It’s an important factor. Prior to having the winze, we were able of hoist rock through a series of winzes. Our employees and the materials we used at the face all had to be driven down to the bottom of the mine and that was costing us up to a couple hours a day in people movement. So by having this winze in place, we can get our crews to the face a lot quicker and the supplies they need to operate the mine. So that’s obviously built into our operating plan in the short term, but we’ll be looking at opportunities to leverage that infrastructure and improve productivities and efficiencies beyond this year.

Botir Sharipov

I guess the last one and more of a general question. Obviously you’ve got to cut some mine plans seeing lower gold price. With gold prices higher recently, has there been any change in thinking maybe trying to ramp up production, increase free cash flow, and maybe sacrifice a little bit on the margin or are you guys fully sticking to the new mantra that David is doing?

George Burns

In the short term we’re sticking to our business plan. I mean if we were to lower cut upgrades and put that marginal ore into the mill, we’ll be sacrificing higher grade order that are in our business plan. So, obviously we’re looking at these things. Where possible, we’ll stockpile this lower grade material that may be economic at higher metal prices, but isn’t part of our short term mine plan. So, I don’t see any impact in the short term. Obviously depending on where the metal prices go and what we decide on reserve price, that could impact reserves going forward, but short term I don’t see an impact.

Operator

Thank you. The following question is from Stephen Walker of RBC Capital Markets. Please go ahead.

Stephen Walker

On Cerro Negro, George, with the development of Marianas Norte going into 2018 when that development’s been completed. What sort of tonnage can we expect from Marianas Norte and presumably the blend would be between the three deposits, but given the tonnes of that northern zone, what can we expect roughly? Is it 25%, 25%, and then 50% from Eureka?

David Garofalo

What you can expect is the ramp up that we’re doing this year at Eureka and Mariana Central will continue and then Marianas Norte next year’s focus will be getting the ramps and development in place so that we can impact 2019. So, there’s not going to be a significant impact. Overall we’re talking about 1,500 tonne a day by the end of 2018.

Stephen Walker

Okay. And I notice it’s not in the projects category of new organic projects. Is that still in the gating stage or has that been approved and will that be run at a sustaining capital or is that going to be a separate capital new project?

Russell Ball

Steve, Russ here. We look at that and consider that part of operations and ongoing sustaining capital in a sense that the mine sites driving and we don’t have a dedicated group outside of the mine site that’s driving it. So, we look at that as ongoing mine optimization.

Stephen Walker

And that’s part of the sustaining capital baked into the back half of the year and then whatever guidance there is for 2017?

Russell Ball

We don’t have anything in the plan for Marianas Norte as of now.

Stephen Walker

George, just going to Eleonore. There was a sharp drop in grades end of the first quarter. Is there a specific reason for that; is that part of the mine plan and where you are in the mine sequencing? Should we look for that over the next 12 months to 24 months to gradually return back to or head towards the higher grades of the reserve grades or was this just a one-off and we should see better grades in the back half of the year?

George Burns

I mean it’s just normal mine planning. The grades in the first quarter came in as planned. We factored in the folding, faulting, and dilution issues and so we’re on track. In fact the thing I’m really happy about Eleonore relative to 2015 is in the first quarter we hit our numbers on tons, grade, and recovery; slightly better on all three. So, they are on track to hit their numbers for the year and we’re excited about the ramp up.

Stephen Walker

And just with the completion of the production shaft later in the year at Eleonore, does that include the loading pockets and all the underground infrastructure but excludes the access to the lower two levels? Where do you stand on that? What’s been done with respect to the underground development or what is expected to be done by year-end around the bottom of the shaft and to the other two lower zones?

George Burns

So, you’re correct. By the end of the year we’ll be hoisting out of the production shaft rather than the exploration shaft and what that does for us, it gives us operating efficiencies and an ability to lower our cost because we are essentially dropping ore through ore passes into the shaft in a more automated efficient fashion than what we’re currently doing with the exploration shaft. In terms of developing horizons five and six, we’re working on the ramp so right now we’re moving three or four meters of development in that ramp headed towards the bottom of the production shaft that will then also give us access to begin to set up horizon six and then later horizon five as future production platforms. So in terms of that production shaft, we will be hoisting from the top four horizons, but there will be additional work beyond that to set up horizons five and six into the production shaft next year.

Stephen Walker

Thank you George. David, just few things first of all an observation and you can get other people’s feedback. But in the previous MD&A you gave four quarter trailing operating data that I found quite useful. You may want to find out whether others have found that useful. But let’s say the four quarter trailing was very helpful watching or seeing how some of the new operations ramped up and how operations turned around. But my question, David, just if I might the last question is on currency hedging what your thoughts are there and given obviously the significant benefits you were able to gain from three regions; Argentina, Mexico, and Canada; are you looking at hedging currencies at all here or what are your thoughts there?

Russell Ball

Steve, Russ I’ll take that. We are looking. We essentially have no hedges, we haven’t put any on for the last year. We have a very small book Mexican peso if memory serves. We’re taking a holistic view at that and actually put it on the agenda to talk to Dave by the end of the second quarter. As you know, we have a number of natural correlations and quite frankly I don’t believe any of us can pick not metal prices, but exchange rates going forward. So right now, we’re essentially fully exposed to all commodities and input costs and that’s a discussion Dave and I along with George and some of the senior folks here will have and we’ll be in a position to outline that after we talk to our Board at the July meeting.

Operator

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

Mike Parkin

Hi guys. Congrats on the good quarter. Just a quick question here on Cerro Negro for George. When we went down to see the asset I guess it was a little over a year ago, you didn’t have very many Caterpillar trucks and you’re noting to us that local trucks for haulage were relatively unreliant. Are you able to order more now with the restrictions lifted in the country?

George Burns

Yes, we have additional Cat trucks on order will be in operation during Q2. That’s one of the efficiency improvements that will happen this year.

Mike Parkin

Okay. Any ballpark number that you could give us in terms of the improvement on OpEx or availability kind of thing?

George Burns

We’re dropping our fleet by two-thirds just to give you an idea of the magnitude and we have very small dump trucks supplementing that 740 Cat fleet and with additional trucks coming in, we’ll be roughly a third of the fleet moving all the tons.

Mike Parkin

Okay, great. Thanks guys. That’s it for me.

Operator

Thank you. The following question is from Jorge Beristain of Deutsche Bank. Please go ahead.

Jorge Beristain

Hey guys. I guess maybe my question’s for Russ but on the $250 million expected savings, I understand that’s the run rate you want to be at by 2018, but could we expect to see a ramp of say $50 million or $100 million or $150 million per year over the next few years or is it more of a back-end target?

Russell Ball

No, there will be a ramp to it. We can’t give that to you, Jorge, we just haven’t done enough work to go out publicly with that. But you should expect the ramp, there is not going to be a sudden acceleration on a day, as George alluded to, we’re taking it every day and you should expect to see a ramp.

Jorge Beristain

And the AISC guidance that you gave us for this year, I’m assuming that’s already baking in some of these expected savings?

Russell Ball

Yes, some of them, but they are savings on top of that obviously which will be offset by the restructuring cost discussion earlier.

Jorge Beristain

Okay. And then when you said sort of to treat equally across the main buckets of sustaining CapEx, SG&A and cash cost of goods sold, I’m assuming percentage wise like each of those could be down about 8.5% at a run rate by 2018 versus 2015 as the base?

Russell Ball

Correct.

Operator

Thank you. [Operator Instructions] The following question is from Anita Soni of Credit Suisse. Please go ahead.

Anita Soni

I just had a follow-up question with respect to Penasquito zinc grades. Right now I think you guys are running a little bit behind on the production guidance you guys put out, I think it was 375 million pounds to 400 million pounds and you produced about 71 million pounds?

Russell Ball

Anita, could you speak up, it’s very difficult to hear you.

Anita Soni

Sorry. So, I was just wondering on Penasquito, the zinc rates that you have there. In the guidance I think you had previously put with 375 million pounds to 400 million pounds, you produced about 71 million pounds this quarter. Do you expect that to ramp up on grade or was that a receivable issue?

George Burns

We expect the grade to be stronger in the second half to support that ramp-up to hit guidance.

Operator

Thank you. There are no further questions registered at this time, I would like to turn the meeting back over to Mr. Garofalo.

David Garofalo

Thanks very much, operator and thanks everybody for attending. Of course if you have any other questions, please feel free to call any of the senior management team.

Operator

Thank you. The conference has now ended. Please disconnect your lines at this time. We thank you for your participation.

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