Perseus Mining's (PMNXF) CEO Jeff Quartermaine on Q1 2016 Results - Earnings Call Transcript

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Perseus Mining Limited (OTCPK:PMNXF) Q1 2016 Earnings Conference Call April 28, 2016 7:00 PM ET


Jeff Quartermaine - CEO


Cathy Moises - Evans

Brendan Fitzpatrick - Morgan Stanley

Reg Spencer - Canaccord Genuity

Duncan Hughes - GMP Securities

Michael Slifirski - Credit Suisse

Jeff Quartermaine

Welcome ladies and gentlemen to Perseus Mining's Teleconference which has been arranged to discuss our March 2016 quarterly report. Before discussing the report I'd just like to take a moment to clarify exactly what occurred on Thursday Australian time which led to a trading halt on our stock being requested from the ASX, now as you'd be aware since Amara's shareholders voted to approve the business combination of Perseus and Amara on the 15th of April our share price has risen quite materially, in fact it's risen from about $0.41 to a highest of that morning of around $0.68 I understand.

Now we've got strong upward momentum continuing yesterday morning, Perseus received a call from the ASX's surveillance team to ask if there's any reason known to us why the share price is rising. We responded that we're unaware of any reasons apart from the fact that the market was getting comfortable with the corporate transaction that was recently completed. We did note that our quarterly report was due for a release today or on Friday. We also noted that we were likely to adjust guidance in that report.

Now the ASX insisted that we release the quarterly report immediately and we explained it wasn't possible to do that as the report hadn't been finalized at that stage. The ASX then gave us a choice of requesting a trading halt or being suspended obviously we opted for the trading halt. And as soon as we're in a position to release the quarterly we did it, that was just couple of hours later.

In my opinion this was an example of somewhat over-zealous regulation which served little purpose other than to cause concern in the Australian market participants and quite possibly informed the market in North America since when the TSX opened trading it did so in the knowledge that there was a trading halt in place, but didn't know why. Anyway enough said about that, it was all a bit unfortunate but sadly it couldn't be avoided.

Now turning to the quarterly report this March quarter's obviously been a very busy and a very important quarter for Perseus. On the corporate front as I noted and offered to acquire all the outstanding shares of Amara plc was made on the 29th of February. The scheme was overwhelmingly supported by Amara's shareholders following the end of the quarter and it took effect on the 18th.

Now as a result of the transaction our share issued capital has been expanded leaving the original shareholders of Perseus with about 65% of the shares on issue and new Perseus shareholders was about 35%. The registered, new register includes many very-very high quality names and I have to say we're very grateful for the support and confidence of all of these shareholders.

Now as part of the acquisition Perseus has acquired plus what we would say is probably one of West Africa's highest quality development stage project, that's the Yaoure project in Cote d'Ivoire as well as the Baomahun project in Sierra Leone. Now Yaoure in particular is an excellent project and our visited the site in Cote d'Ivoire on Tuesday this week with our technical time and I can say that we were all very impressed by what we saw and we feel certain that this project will become very substantial contributor to Perseus's production cash flow on earnings in the very near future.

Apart from acquiring high quality asset the deal with Amara was primarily motivated by our strong desire to achieve geopolitical and technical diversity, as a means of reducing the overall risk profile of the company as well as providing a platform for significant growth in the short to medium term. You know as we've seen only too well in recent times being a single mine, single country business is less than optimal from a risk perspective. We're certainly convinced that that this transaction achieved both objectives of improving the quality of asset portfolio and also improving a risk profile and we've now embarked on a very intensive program at work aimed at unlocking the significant value locked up in that company and delivering its value to shareholders.

The question that's being most frequently asked of me about the transaction and our plans for transforming Perseus from being a single mine producer into a very significant gold producer, is how you're going to fund the growth. Well put very simply the answer is as follows, it's our intention to implement this growth on an incremental basis starting with the development of the Sissingue project and then following this up with that Yaoure as soon as time and finances permit.

Sissingue will be funded through a combination of our cash and debt finance and we're very well advanced on bringing this funding package together and hope to be a position to announce the path on the funding fairly shortly and recommence work on site at Sissingue. Now we can get Sissingue away in the June quarter we should be producing gold and cash flow from the mine by around the middle of next year.

The Yaoure project requires propriety work to bring it on soon, we estimate that it's going to take about 24 months to complete a comprehensive feasibility study, finance it, get it fully permitted and plan construction. Now in 24 months from now we'll have low cash flows from both Edikan and Sissingue if everything goes according to [Audio Gap] and to those of you who've read our recently release documenting an upgraded life of mine plan for Edikan will know, the cash realized from that mine from 2018 onwards, fiscal 2018 onwards will be very-very significant and using our cash plus corporate debt we believe we'll have sufficient capital to fund the development project.

I should point out at this stage that we're envisioning a smaller project at Yaoure than was originally planned by Amara and as a consequence of this, this will be less capital intensive than what they were talking about. That’s not to say that over time the project won’t be expanded, of course, should gold price and gold reserves permit it. But we have to live within our means and, if we do this and financing, our development plan is certainly achievable. I should also say that there are several key assumptions underpin what I’ve just said not the least of which gold price performance of Sissingue and Edikan to plan and, of course, no major capital increase in capital costs and of course, if any of those variables change materially, then we’re going to need to reassess our plans going forward.

Now, speaking of our financial capacity and Perseus’s financial position has remind relatively strong at the end of the quarter, we’ve got about 106 million of working capital on hand, which includes immediately available cash in bullion of 72 million. We’ve got our gold forward sales, 133,000 ounces at the average price of U.S. 1,258 and we have no debt at the present time, other than accounts payable in the ordinary course of business. We do not that the cash balance or the balance of cash in bullion, has reduced a bit this quarter. There are several factors that have contributed to this, most notable capital expenditure on housing at Edikan as well as the purchase of a power plant for Edikan. It’s our intention to be fully independent of the Ghanaian power grid by June this year and we have paid for the acquisition of that plant in this quarter.

Clearly gold production fell a little short of that plan and I’ll talk about this further in a moment. But I should also note that our revenues a little lower than it might otherwise have been during the quarter. Our average sale price was $1,119 an ounce and this came about, because we deliberately deferred closing out some of our high priced hedge contracts during a period in favor of closing at low price hedges. And was done deliberately to make the high price hedges available to support any debt financing that may employ on the Sissingue project.

Now the exact uses of that cash over the last nine months since during the last financial year are documented in some detail in the quarterly report, so I won’t go into those. Suffice to say that any accounts for the largest portion of the cash that we’ve used about 60% this involves both working capital and VAT. Our VAT receipts heavy incremental gone up with in recent times as the government have been tardy in making payments. We have actually received some cash from them in the last month or so which has helped the situation a little, but certainly, when you’re not getting your VATs returned or netted off you, you are using cash. Investment in Sissingue accounts for about 85%, so, sorry 25% between the two that’s we’re talking about 85% of the cash on those two projects.

Now turning to the Edikan operation, it has been a challenging period for purchase. We flagged that there were some issues around grade control in the last quarter, we’ve had very intensive way program being implemented this quarter to adjust our grade controls and techniques and get them better suited to be geologic recognitions and there as a consequence improve the grade of ore delivered to the mill for processing.

Specifically, we have used expanded geologic data sets and trying to understand the mineralization controls that are operating, we were including alteration, lithology and structures in the modeling of the -- geological modeling of the ore bodies and also including data relating to those issues into the modeling, we’re using this software now, we’re using GCX instead of MP3, which is mostly to this more complex kind of modeling. We’ve put a lot of effort into getting ahead describe control scheduling and drilling and monitoring blasts and incorporating movement in the final dig block mark outs and being bit more selective in the mining of the ore body as complexity necessitates.

Now, by quarter end there was a strong evidence of improved reconciliation between the resource model and the ore control model of the mill. We’ve seen progressive improvement each month, which is very pleasing. While we still have a little distance to travel before being completely satisfied, we’re in very much better shape than we were and we’ve learned some very valuable lessons along the way. When I say valuable, they will be absolutely invaluable when it comes opening up new mining areas at Edikan and also Sissingue and Yaoure in years to come. So the lessons certainly won’t be lost on us.

So now that the implementation of the operational improvement is largely complete in the grade control area, what we’ll be doing is doing a further program of work trying to understand local variations in geology and grade. This gives us the opportunity to improve our grade estimation if we get all this right. So that is a positive.

Now as a result of the work that we have done, we saw a 15% improvements in gold production quarter-on-quarter so we produce 37,150 ounces, which is 15% up in the last quarter. Now, while this is stronger than last quarter, it was a bit lower than we planning to achieve and there were two causes for this. One was certainly the grade control issues I’ve mentioned. The other effect it was that we’ve mined a lot more transitional ore than we are expecting to do and this is about because the depth of weathering in both Fetish and Chirawewa is deeper than anticipated.

Now both of these could have water in them and that meant that drilling directly under the pits was impossible while that was the case. And so giving the exact location of that weathering profile was a bit challenging. Now, while this transitional ore has been carrying fairly decent grades, we were unable to process all of it and still maintain the mill weight, what we needed to do in order to keep the mill weight that we need to do in order to keep the SAG process operating. In order to maintain mill weight what we needed to do was to strengthen the blend with fresh ore and the only fresh ore that was available to us was relatively low grade, so in other words we were displacing higher grade, softer transitional ore with harder ore and just happened to be that harder ore was lower in grade and the positive side of this situation is that we have stocks of higher grade material on the ROM pad right now and this will be progressively processed in future period, so it's not as if that gold has been lost.

Now turning to operating cost, a reduction -- we did slow down mining as part of that grade control exercise and as a result of the reduction in the tons of material mined as well as increased blasting because we're getting through the transition into the fresh material and of course there was some one-off expenditure on the great control activities, bringing in consultants and the like. Our unit mining costs did increase during the period $3.14 a ton, it was coming off a very low basis $2.65 a ton last quarter which was probably a little bit unrealistic to think that would continue given that that was achieved in very soft ore and also at the top of the pit where the vertical climbs and hole distances were much larger than they are now.

Now the increase in mining was partially offset by decrease in unit processing costs, so we managed to bringing the costs of processing down to $9.11 a ton and we also growth G&A costs as well down to 0.95 million a month. So that was the key drivers, when we look at the costing on a per ounce basis, we actually reduced the unit production cost of about 15% to $1,034 an ounce, but while doing that these sustaining capital expenditure increased in line with plans, that went from $118 amount last quarter to $322 an ounce and that resulted in the all-in SAG costs increasing to $1,441 an ounce. I’m sure we pointed out and I'm sure, you don't need to recall this, but I’ll just remind you just case you do, but when we're talking costs per ounce, it's a function of both costs and ounces. So, if the ounces are down unplanned then the costs per ounce is increase and that occurs even if the cost basis fell steady or even slightly reduced. Now it's pretty clear to us, that the key for Edikan's profitability is producing ounces and that's what where our focus is going to be on, it’s always on that, but certainly having done the work that we've done in this period will be looking for improved production going forward.

Quarterly gold sales increased 11% from 32,616 up to 36,355 and the sale price as I mentioned was 11.90 [ph] an ounce, I mentioned reasons for that being down little bit relative to the last quarter, just a few minutes ago and the infrastructure works, as I said, we certainly have accelerated, but that's expenditure on housing to relocate the former residents of Eastern Pits and Esuajah North that exercise is well and truly on schedule and it's under budget and the first houses will start to be available for occupation in June of this year and hopefully the end of the last ones by the end of the year.

I mentioned earlier that we've also been underway with the construction of a power plant and this should be completed sometime this quarter as well, what we have aiming to do there is to make sure that we’re totally independent of the grid in Ghana, that's I mean to say, we're switching to generate all of our power using diesel, that's not the case at all. We'll continue to draw power from the grid, but should the grid for any reason go down, be it a spike or a longer interruption then we will have the capacity to continue our production by switching on the generators. So I think there is some money involving in building this plant, but I think that given the vagaries of the Ghanaian electricity system this is money very, very well spent.

Now, subsequent to the end of the quarter, the work certainly didn’t stop and you would have noted that we updated our Life of Mine Plan for Edikan fairly recently as it was the 18th and 19th of the months, indicated a materially improved cash flow based on seven and half year mine life, averaging 223,000 ounces of gold a year, at an all-in site cost of $865 an ounce. I should point out the Life of Mine Plan starts from 1 July, 2016 and so these people were asking me today about why guidance wasn't incorporated into all this, this is a separate exercise to guidance and I'll come to the guidance in just a minute.

The Life of Mine Plan as I said, it shows, it's early decent gold production over the next few years, so it's certainly the next five years are very strong, the 8,000 [ph] ounces a year and then of course it tails off as we start processing stockpiles, we've got about 10% decrease in the forecast average drilling for costs over the next five years 8% overall, down to $865. Of course the plan going forward is underpinned by assumptions relating to improving bottlenecks in the plan and having the diesel-fired power station available to us, what it also incorporates of course is, as we know, is we've removed the development of the Esuajah South open pit from the plan, it’s had minimal impact on production but what it has been achieving is given the substantial reduction in capital cost and it's move forward the availability to the cash flow generation by about 12 months and then very, very important in the context of having cash available to develop the Yaoure project in Cote d'Ivoire.

Now also subsequent to the end of the quarter we've adjusted our guidance for the period. I may have mentioned of that earlier on, talking about planed trading halt. We're now predicting production of 75,000 to 90,000 ounces for the six months at June 30 and we're predicting that will occur at an all-in site cost of about $1,350 an ounce. And there is several things I want to say about this guidance change. Firstly, the fact is that warranted a change in guidance in the first place only occurred in the last two weeks or so.

In specific terms, a mill shut down a mill shut down that was scheduled for -- it was meant to be a 60 hour shut down, scheduled to start on the 13th ended up in pertaining for six sides. Now why that occurred was as soon as the mill was opened to do some relining, it was found that -- in fact the liners had worn very significantly over the last or since the last re-line and the reason for that was -- it was a couple of reasons for that the one of which was we have been processing fairly soft ore that just sloshes through the mill and it has a very eroding effect on those liners.

So when we got in there it meant that not only did we have to replace the front end, we had to do the whole mill and what that meant was that we brought forward a shut down that was scheduled for May three days in May, we brought it forward and we did the whole lot in the single go. So we are down for 60 days and again on 19th and again on the 22nd we had some unexpected shut downs, that the consequence of those was it meant that we are very unlikely to achieve the guidance that was in the market, so as soon as this was confirmed we had to come to the market and we disclosed that view. So quite simply the reason it wasn’t to disclosed in the Life of Mine plan was published on 18th, it was simply that we weren't aware that we had a problem at that particular time and that didn't crystallize until after that. So we have been very prompt in our disclosure.

The other thing that I want to say about this change in guidance is that these factors do not, and I stress do not, represent fundamental problems with Edikan. They represent very untimely and unfortunate events that occur from time-to-time in the mining business and I most sincerely hope that don’t occur again because apart from anything else they deflect attention from what otherwise would have been a very successful and productive quarter for Perseus.

Now the team on site is very well aware of the consequences of these sort of things and I've got every confidence that they’ll be doing everything in that power to recover the situation and make sure it’s not repeated. I am pleased to say that in the last few days, production has actually been very good from Edikan and if I continues the June quarter will turn off to be not too bad after all, but anyway there is a plenty of water to go into the bridge between now and then and plenty of opportunity to improve that performance.

Now turning to Sissingue. We continued work at Sissingue on the early works program, we finished off a lot of the site cleaning, fencing et cetera. So that project is now well and truly primed and ready to move into full scale development as soon as funding is in place and we’ve continue the work on that financing package and as I said earlier on, we're not very far away from being in a position to announce, how we're going to finance that particular project. We need about let's call it $100 million to finish of the build and we are as I say fairly very well advanced and should be able to publish some information around that fairly shortly. We've also been continuing with our work with the community, and I think that one of the features of the Sissingue project which is really important is that we have built up a very strong relationship with the community and I think our social license there is going to stand us in good stead as we go forward particularly in terms of maintaining security in the area.

Looking forward, we've got a fair bit coming up in the next quarter, we do expect to announce an upgrade of the Sissingue results explorations excess to that I would think to put into our results, so that will be announced fairly shortly we have to be keep eyes on to the details with the Sissingue financing and announce the restart of construction activities there. We also expect to be able to announce the accrual of the environmental license for Yaoure. There was a hearing held in Cote d'Ivoire the other day that went very well and we expect that license will be issued fairly shortly.

We are also going to start a 42,000 meter drilling campaign at Yaoure as part of the feasibility study and well I think would be getting some pretty decent outcomes as the result of that The guys on site this week were very excited about what was happening and we're looking forward to sales coming through and of course we do expect to be able to announce the improved performance at Edikan and that's something that we’ll be very focused on because that's very important for us also going forward.

So there is a good level of news flow coming forward and so in summary and in conclusion it's been a very busy year and important quarter for Perseus, we’ve made a platform for the transition of Perseus into a genuine mid-tier gold company. We have achieved material improvements at Ediken, I'll be at the -- some of the very good work it's been and would say the work that’s been was undone -- the work that’s been done was undone by dropping the ball late in in April and we have made Sissingue quarter to starting line and in all of those things also are very well to the future we are very optimistic about the future and by default the outlook for our shareholders.

Clearly we need to become more consistent in our performances at Edikan the performance of this will increase -- the importance of this is going to increase in coming months and years as we execute our growth plans. This message has certainly not been lost on Perseus' management team and I look forward to our next teleconference to in about three months from now and being able to report on a full set of the positive developments. So I thank you very much for participating in the call. I'll now open the call to questions.

Question-and-Answer Session


Thank you, [Operator Instructions] your first question comes from Cathy Moises with Evans and Partners, please go ahead.

Cathy Moises

Jeff, just following on from the lower grade, and I know some of it is not relating to Chirawewa and Fetish, but can you just outline sort of how the reconciliation is tracking? I mean, I do notice that the grade is improving month on month so we can sort of look to -- and how it's reconciling in the primary versus the transitional if possible.

Jeff Quartermaine

Well, not making a distinction because I can't give you anything about a distinction between the two. Look it's getting close, so Cathy I don't want to go into details, the reason I don’t want to do that is because you know talking about these things at a point in time doesn't really make a lot of sense. What is important is that the trend is, the gap is closing and it is closing fast so that's the important thing. It is pretty perilous to look at these things and draw conclusions from a moment in time. Even on the Western pits where we draw the conclusion of the stages of the Western pit mine we ended up with 100% reconciliation on gold. There were periods when we were under and there were periods when we were over and you know what I did learn from that exercise was not to put too much attention on the individual numbers but to look very closely at trends. That's what important.

Cathy Moises

Jeff thank you.


Thank you. Your next question comes from Brendan Fitzpatrick with Morgan Stanley, please go ahead.

Brendan Fitzpatrick

Morning, Jeff. Curious when we're talking about the project financing options, there's the warrants from the Amara transition potentially bringing in 63 million. My understanding is they're all in the money, therefore it's a reasonable expectation that they would be exercised. Curious enough to know if there's been any indication as to how soon you might expect a proportion or complete exercise on those warrants and whether that's been factored into the funding profile that's going to be used for Sissingue?

Jeff Quartermaine

Well we certainly have made an assumption that that money will be available and given that the term on those things is three years, 36 months. You know that's the -- it's the outside when the liquidity come in, but actually I expect that some of those would be exercised fairly shortly. There are some of the Amara shareholders who aren't permitted under their mandates to hold non-listed securities and I know that some of them were looking to sell those warrants, but they have withdrawn from the market and probably on the basis that they'll exercise them now and hold them this year, so that will result in cash coming in sooner rather than later I would think, but some of those holders are quite significant, actually.

Brendan Fitzpatrick

Okay and changing topic, the revised Edikan Life of Mine plan, if we look at the graphical representation of the mining pits, so we've got quite a lot of pits and then we stabilize in a couple of years' time, I just wanted to confirm that the variation in the ore sources is what contributes to the difference year to year in the mine processing volumes ranging between 7 tons and 7.7 million tons a year over the next several years? Similarly with the recovery, that just the different ore sources which determines the throughput rates in recovery?

Jeff Quartermaine

Yes, that's absolutely correct, some of the material is harder and softer than other material and that has an impact. We're going to try to mitigate that as much as we can through blending, but you there's only so much that you can do, but no that's absolutely correct.

Brendan Fitzpatrick

Okay, thanks very much, appreciate it.


Thank you, your next question comes from Reg Spencer with Canaccord Genuity, please go ahead.

Reg Spencer

Thanks very much. Morning, Jeff. Just a couple of questions from me. The first one relates to VAT receivables. Are you in a position to tell us how much is currently outstanding and what we might expect to be received over the coming 12 months? I know that's not necessarily an easy question to answer, but just trying to get an idea of what cash you could expect to come in on that front.

Jeff Quartermaine

Well, it’s a touch over 20 million U.S. I believe that is outstanding at the moment and I can’t predict on the timing. What we were doing very successfully very -- the government allowed us officially to offset taxes that we would otherwise have paid against VAT receivable. So there was a treasury credit note system in place that allowed us to do that. About a few months ago they withdrew those treasury credit notes in favor of paying us cash. We did receive some cash and of course immediately used that to pay down the taxes that we owed them.

So it's very difficult to predict the timing and quantities, there's no patent and there's no set quantity around it. I mean if I had to make a guess on it, I would say there’s probably going to be less money paid in the lead up to their election, which is in November, than would be paid afterwards, and that assumes of course that there’s any money afterwards available to pay. But this year in particular, I think it’s probably going to be a little bit of the stretch and probably what we will do is to stick to reimplement that treasury credit note system and to have a perfect offsetting arrangement in place. So it saves angst for everybody that way.

Reg Spencer

Yes, I appreciate that. At Yaoure I know that we probably should be waiting for the feasibility study results or more guidance from you guys as to what the project may ultimately look like in terms of size and scale, but you mentioned on the call a bit earlier that it may look like you'll start with a smaller project requiring less CapEx. Are you able to give us at this stage any guidance around that or we're just going to have to be patient on that front?

Jeff Quartermaine

No. Well, let me, you’ll need to be patience for the final result but let me tell you what our thought processes are at the present time. When we did due diligence on Amara, we took the drill database and we estimated the results from basics. And then having done that and got reasonable similarity between their estimates, we then optimized our pit design and our project design and we used their cost base with our own as cost assumptions overlaying on top of that. And we came up with the project that was somewhere in the order of 3 million to 3.5 million ton per annum compare to the revised optimization of 4.5 million ton per annum.

Now whether it’s 3.5 or what will depend on what happens in the next 12 months. Certainly from the visit to site this week, we’re very optimistic about, what the drilling is going to generate over the next few months and if in fact some of our expectations are realized we may well go a little bit higher, but in deciding the sizing of the project there are three factors that need to be taken into account. On clearly in the most important one is the return on funds employed, so the net present value of the optimize pit. The second factor that is very important, that has to be taken into account, is the financeability of the exercise. There’s no point in us coming up with a huge put we can’t fund the exercise. So that’s real world. So that has to be borne in mind.

And the third thing is that what we have learnt from Edikan is that having a low grade operation is not as good as having a high grade operation. So if by starting the mine a little small, I mean the we will have a higher grade than that is something that we look on pretty favorably. Particularly, for the early year, so we’re in the ramp up phase. Having a slightly higher grade would give us just that greater degree of flexibility to deal with ramp up issue should they and we know that they do occur. So as we go forward over the next 12 months, we’ll have those objectives in mind and try and produce a project that is going to generate the best outcomes for us.

Reg Spencer

Okay, that’s fantastic Jeff, and just one other thing on Sissingue again, it is not really a question that you may be able to answer right now, we’ll just have to wait for the financing update. But I refer to a presentation you guys put out a week or two ago and you talk about a ring-fenced financing of Sissingue. I presume this really revolves around securitization of that loan against Sissingue itself versus the other assets?

Jeff Quartermaine

That is great. And the reason to doing that is that we want to try to make sure there is nothing that we do in the funding of Sissingue impairs the financeability of Yaoure going forward. We don’t want to have any residual hooks into any of the other assets that causes a delay in getting that funding in place.

Reg Spencer

Fantastic, one final question from me, the costs for installation of the back-up diesel gen sets, have you -- is that a material number or are we talking -- are you able to give us an idea of how much that would likely cost?

Jeff Quartermaine

As you recall, we installed full units last year. And we’re doing about another dozen now and it’s costing us quite a lot less than you might imagine actually. It’s about -- all of the having the full capacity is going to cost us about another $8 million from where we are -- from where we were let me started the exercise. That includes both purchasing the units and installing them. We’ve got some very good, very low-hour, second hand low-hour units that have been reconditioned in a very fit to purpose. The fact is, as I said we’re not going to run this things full time, it is really in the event that the grid goes down for a period of time. So having second hand units is more than satisfactory and it gives us a very cost effective solution to what could become a serious problem if drought conditions continue in Ghana and then hydro-dams are down.

Reg Spencer

Understand. That’s great. Thanks very much Jeff.


Thank you. Your next question comes from Duncan Hughes with GMP Securities. Please go ahead.

Duncan Hughes

Morning Jeff, a couple of quick questions, one is obviously you've learnt a fair bit about grade control this quarter. There -- that obviously comes as a cost and perhaps would impact timing of your mine plan from FY17. So I just wondered whether any additional costs and timing needs to be factored into that. The second one was mill recovery seems to be hovering in the early 80s. Is that a reflection of grade, in the sense that if grade rises, can we expect that to rise? Or is there anything else we can expect for that?

Jeff Quartermaine

Well first question, the extra costs of grade control has been factored into the Life of Mine numbers, so there's no incremental costs over and above what we’ve published. The issue around recovery is influenced more so by the quantity of oxide material that's going through the mill. Now the transitional ore is carrying a lot of oxide and it's impossible to say precisely how much, but that's having a major impact on recovery, as the quantity of transitional ore decreases then we would expect to see the recoveries increase. Now obviously if you have much higher grade then recoveries improve as well, but the major factor that is causing it to be down at the moment is that transitional stroke oxide ore that’s going through and in fact if we make some assumptions around how much oxide is going through and we're actually not too far from where we should be.


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

Michael Slifirski

Thanks, yes Jeff could you help me understand really the sort of information deficit that you've struggled with where you don't know what you don't know and you've learnt along the way in terms of grade control, more complex geology, difficult transition zones, more wear on the plant than you expected? All those bits and pieces that you've learned, in terms of that information deficit, is that all behind you now or when you look at the life of mine plan and areas that you'll be mining in future, are there pits amongst that where there isn't yet knowledge? Or do you think with what you've done to date, you've gained sufficient knowledge of the various ore types, various geologies that risk is largely behind you now?

Jeff Quartermaine

I think in truth you answered the question yourself. I mean, if we don't know, we don't know it, then we don't know it. So, that's the case, having said that, Esuajah North pit which is the next one to go, we believe it is very similar to the Western pits, It's a big ground ore deposit, but having said that, we've actually going to be applying the same very rigorous technique on to every pit that we're going to going forward just in case and if things turn out, but better than we expect and we can back off from some of those things and we will but now look we'll certainly be employing, a higher level of rigor, we won't be taking anything for granted in any of the areas going forward, and that’s not to say we won't ever have problems again, chances are we will but I think part of the issue with these Eastern pits was because we were delayed getting in there, we were so anxious to start mining to try and pull back lost time, as a result of the delayed that we probably didn't give it enough thought going forward.

And I mean if we actually look back on the records that were available within the business, we probably should have known that we grew -- we were looking down the barrel of some significantly different geology and therefore some issues around grade control, we should have known that but we didn't, we have to looked in our haste and we’re paying the penalty for it.

Michael Slifirski

Okay thank you and the extension of that Jeff, with the additional grade control that you're doing what sort of information time do you have? Do you have sufficient time between completions of grade control work to adequately schedule? What sort of look forward are you actually getting that enables you to make adjustments where you get surprises?

Jeff Quartermaine

We've got adequate time is the answer now and that was actually one of the real issues that we do have with, the grade control drilling was slow, the availability of rigs is unsatisfactory to be perfectly frank and so the pace of the grade control drilling was slow, meant that we had the miners right up their back all the time, which meant that they didn't have adequate time for planning and for consideration of the data.

So what we do is part of this exercise was we built up quite a lot -- a number of more rigs on sight so at the moment we’ve got four rigs down in that pit and I was down there the other day and I can tell you they are all going flat out at the moment. So having got ourselves well and truly ahead, it's given us adequate time to look at those extra data sets, factor those extra data sets into the modeling and then really, one of the faults that occurs these days is a lot of the planners fall in love with computer programs, they don't actually think too much around what they're doing and go down and work it out on the ground, very key think, we have to make time available to do that fundamental work and that is one of the big changes that we've made.

Michael Slifirski

Great, thanks, Jeff.


Thank you. There are no further questions at this time. I'll now hand back to Mr. Quartermaine for closing remarks.

Jeff Quartermaine

Okay. Thanks very much, everyone for participating in the call. As I said earlier on, you can see that we're making progress and issues that we've had, are not long-term issues, they are annoyances and costly ones, I might add at that, but annoyances nonetheless. Anyway, we're looking forward to better quarter and as I said, I'm looking forward to being able to deliver you better news as we go forward. Thank you very much and we will see you shortly.

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