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Randgold Resources Limited (NASDAQ:GOLD)

Q1 2012 Earnings Call

May 3, 2012 11:00 AM ET

Executives

Philippe Liétard – Chairman

Mark Bristow – CEO

Analysts

Josh Wolfson – Stifel Nicolaus

Patrick Chidley – HSBC

Angela Tindyebwa

Operator

Welcome to the Randgold Quarter One Results Conference Call. My name is Sara and I’ll be your coordinator for today’s conference. For the duration of the call, you will be on listen-only. However, at the end of the call you will have the opportunity to ask questions. (Operator Instructions)

I’ll now hand the call over to Philippe Liétard to begin the conference.

Philippe Liétard

Hello?

Operator

Hello, please go ahead. Your line is live.

Philippe Liétard

Okay, thank you, thank you. And good morning and good afternoon and welcome to you all for the presentation of our first quarter results. The first quarter was indeed one of which really tested the metal of Randgold Resources management. There was a military coup in Mali and a few flare-ups in its aftermath, followed by change of government. And these are inevitably impacted on our operational environment not to mentioned on the mood of the country. While several like such contractors left Mali on the advice of the government’s our own team held it’s nerve and came through the crisis without needing to realize it’s production guidance.

That’s dramatic, but equally challenging where the developments at our other businesses not only at Tongon, we are shutting down and starting to ramp up production and at Kibali, which is maintaining its momentum, with construction getting underway.

Also during this quarter we published our annual for 2011 and I believe that it marks a further advance and address to communicate fully and transparently with stakeholders and with the market.

I’m particularly proud of the sustainability chapters which presents how we take our investment in social equity as seriously as our investment in the discovery, the development and the operation of our mines. It is available on our website, if you want to see it. We’ve also recently had our Annual General Meeting and at the time when investors are increasingly questioning company board, our shareholders overwhelmingly supported all the motions put to them, including doubling of the dividend. This again concerns our view that are shareholders subscribe to our long-term strategies and regard themselves as owners of the company rather than mere traders of our paper.

And with that, I will hand you over to Mark for his overview of the company’s performance and prospects. Mark?

Mark Bristow

Thank you very much, Philippe, and again good afternoon and good morning to everyone who is finding from Africa and Europe and the Americas.

I think just – my intention by the way is not go through a detailed presentation, but just to touch on the highlights. The full presentation that we gave at the London Stock Exchange is available on webcast on our website. So I’ll refer you to that if you’d like more detail.

Key is to give you an outline and then open for questions, a strong start to the year, very much in line with guidance. As Philippe said, also in line with our – focus on global best practice, our 2011 accounts included comprehensive sustainability report. And in the presentation today, my first slide highlights some key social safety and sustainability issues.

One pleasing to see our reduction in the missions on the back of the switch to grid power at Taiwan, more or less made huge inroads to ensuring it’s recycling percentage or higher level of recycling of water up to 90% now our Gounkoto joined Morila and Tongon with lost time injuries this last quarter, which is a significant achievement. We have some work to do at Loulo, we had four loss time injuries this last quarter. Kabali lost time injury frequency rate has come down materially from last year’s average. So again we are making progress and on top of that and despite some of the challenges that we had to deal with as management we still talk to support our communities and make sure that we acted as a good and supportive corporate citizen within the countries that we operate.

Moving to the next slide, key is just to remind you that we did update our reserves and resources and again I would just like to highlight, that we are good to our strategy and that is we believe in quality and the reserve statements reinforces that in an industry that everyone is downgrading, the grade of reserves we were able to improve the grade of reserves. And we are able to maintain our reserve profile, despite keeping the reserves up. And again I hopefully in the plenty of the presentation I’ll be able to point you to the upside for us to continue to be able to grow our reserves in the future.

Next slide, really highlight for the quarter. As expected profits and production were down on last quarter’s record levels, but well ahead of last year’s corresponding quarter and in line with our plan. Philip pointed to the fact that we haven’t changed our guidance either as far as gold production or as far as costs. And we are going to see the reason to do that on the back of the back of the body situation and they said it were to deteriorate and get to a point where it impacted negatively on our operations.

As far as cost goes, the biggest driver is really the field process and right now we are with the current field process we are within guidance. Morila had a stellar quarter again, it’s really – it paid another $15 million in dividends and most importantly the Kibali project eventually got going and as we entered into the construction phase which is a big step forward an exciting time for us to be able to start with other mine board.

The challenge in the quarter was really Tongon and I’ll catch on that a little while later. If we move to the next slide and that’s the summary financials, key for us is the improving trend in total cash costs will be if that is was masked by the lower grades particularly at Gounkoto, they were within plan that aggregate cost came down with – I really feel that we made tremendous progress in our cost control and our ability to manage particularly the Loulo complex.

Notwithstanding that profitable in every sense. We – at this point due to the cash and cash equivalents you can actually add another $30 odd million to that $456 because we sell a quite a bit of gold at the end of the year, end of the quarter, but didn’t get that cash through into the balance sheet. So you will find $30 million in bases that should be in the cash. So, we kept our cash pretty much level and that was on the back of about $112 million of capital spend. So, every you look at Randgold, it’s profitable.

Moving on to the specific operations as I pointed out Loulo complex are very good performance. First time that it has really met this guidance, internal guidance or internal budgets throughput up significantly, recoveries improved, aggregate costs were reduced. The important thing is cost of the underground mining unit costs also came down which is the first time. The high operating costs is really due to the drop in grade and the drop in grade is in line with plan.

The summary results for the Loulo and Gounkoto complex is the next slab key despite the grade coming off some more than 25% costs are not commensurately up. Aggregate costs again down and again we will build up that grade as we guided at the beginning of the year slowly through the quarters that come. I think the big takeaway for us at Loulo is the milling capacity. As you know we commissioned the third mall at the end of December, you’ll see at 987 just a few thousand ounces short of 350,000 ounce average – 350,000 tons a month average for the three months.

And so the third0020will came on stream and ramped up much faster than we expected and that really helped us achieve our plan despite the slightly lower grades. And just, for those who follow, it’s worth noting as we did last quarter, we are not high grading Gounkoto, we are mining it as per the schedule. So there will be some variation in the fee grades, but we are not stocking out or pulling any stock pile into our balance sheet, we are processing it to our and those that we (inaudible) fits it’s into the category of marginal ore.

Recovery is up, which is pleasing and we move to the next slide. Randy, I think I just wanted to update you and we have spent quite a bit of time at the presentation on the expansion option. This is a progression from the heap leach opportunity that we shared with you last quarter, where we showed that the heap leach wasn’t a viable alternative to bring some of the resources to account. What was the – third more commissioning so quickly, we can see ourselves been able to squeeze out another 20,000 tons capacity with us – relatively small capital expenditure, but what’s also interesting is, engineers feel we can reconfigure the plant and list that throughput up to about 450,000 tons a month of 5.4 million tons a year.

That re-price about $100 to $120 of capital and if you go to the next slide you’ll see an opportunity, there is a – on a standalone basis that has a very good numbers, meets our criteria in every aspect. And just to give you a summary that’s the marginal costing in other words the costing of these proposed expansion on a standalone basis. If we look at it as consolidated business within the Loulo-Gounkoto complex effectively what it does is that adds another 80,000 ounces a year to the profile and its increases the total cash costs by about $50 an ounce.

So, a good business is still lot quite away before we can bank it we wanted what we wanted is show you is that potentially viable and now the big focus is to go back to go the resources of which lot of inferred and put some confidence in those estimates and then we all with the intention of completing study by year end. And we’ve also got a bit GAAP analysis to do because there is an opportunity we believe perhaps not get into the full 450,000 tons, but been able to got partly there without as much capital. So, we’ve got a bit of work to do.

Next slide, working through the Loulo standalone results again encouraging dropping unit costs cost despite a lower throughput and lower grade and this is really driven by the underground reduction in costs. And it’s a first time that the full tonnage from Loulo to the plant was sourced from underground.

We had a little unnecessary dilution in the grades from underground at Loulo driven by one of the early stocks in the quarter, which we broke the Hayneville contraction and took a whole waste into the oil feed we have dealt with that now and we’re much – the mining is really working well.

If we move to the next slide, just walking through the underground depth really shows how we’ve been able to constantly improve both the development needs and tons mined quarter-on-quarter and we’re pretty comfortable that we will show a steady improvement in both criteria over the next couple of quarters. Our target being to get to 200,000 tons and mines from underground by year end.

At the same time as you know, we’ve been busy with the push back at the Yalea South that is ahead of plan and so that brings additional flexibility to the project and just to that the consequences of that albeit that Gounkoto contributed 70% of the gold this quarter. By the end of the year we’ll have 50/50 Gounkoto, Loulo. So, Loulo is going to close on back over the next couple of quarters.

On the next slide just to reinforce that we’ve made some very good progress on the detailed scheduling of the underground. We now had acceptable and sign of development plan and our focus over the next two quarters is going to be optimizing that plan and making sure that we schedule any irrelevant development and ensure that we are being focused working on our return on capital.

Next slide is just to point out that we haven’t stopped thinking about the future and that is the Loulo underground exploration work we’ve been doing recently has indicated some potential for down-plunge extensions of the high-grade deposits both in Gara and in Yalea. And the stars that we showed in the – in the long session are planned deep holes that would be drove to test that model. So keeping that this is not going to change the size of either Gara or Yalea as far as ability to treat this as a plant, but it would just add loss to the project.

And of course, the next slide is the Loulo Permit and Brownfields exploration and the key to this – the demonstration or intention of this slide is to demonstrate where the resources are being supplied for the expansion strategy. And these are resources that haven’t had attention because they dried and they really on the margin and they don’t compete with the program or fee that we’ve got scheduled for the current processing slot. But if we were to expand them, we will be on the axis of slow radar.

Moving to the Gounkoto side of things, I think the key event for us, this quarter was the siding of the Gounkoto convention, which clearly sets the fiscal regime in which we were develop a Gounkoto project and separate it from the Loulo company. Gounkoto itself had a good quarter. Costs were up – unit cost ounce were up because the grade was down and again that was just the ore body grade. There is no other reason for the grade coming off aggregate costs were well in control and again as we’ve indicated the -we will see a step wise improvement in grade as the pit in the North deepens and starts exploiting some of the higher grade or by the end that’s increases trade with depth over the next couple of years.

Moving to the next slide, these are the numbers again our improvement in recovery of grade as I referred to the drop in grade extra throughput really well within line of our plan. We’ve got a big slide. So, the next slide is just looking at we’ve got some work to do in Gounkoto as we look at the reserve and resource and half of mine potential. We will see it on the rest of the southern end of the pit or the left-hand part of the diagram is the high grade zone doesn’t go down as deep as we initially expected it to go. So, the key is optimizing to take that higher grade or not leave any the foot wall or in the bottom of the pit.

And then on the jog zone again there is a quite a bit of work to do. As far as this is a high grade purple patch style underground deposits. We’ve just done some twin holes which are the M6 in this slide and they have certainly reinforced the quality of this whole body. The key now is to complete the drilling technical information to be able to decide how deeply you are going to the put-in and what sort of strategy we are going to develop for exploiting the underground portion. And we expect that scoping study to be complete by the year end.

Moving the next slide as it blows up is really a look at the Gounkoto permits and the main target and a reinforcement that there is still upside potential brownfields upside potential in the Gounkoto permits.

And then in the slide taking a step back and looking at the whole Loulo, Gounkoto, Bambadji region, one of the latest developments is – has been in the northern part of the Gounkoto pit. We highlighted a very thick paleo-alluvium horizon which is clearly masking the geochemistry anomalies and that’s showing and that’s in this slide of lot stabilizes it.

And so in the key that we got the stick cover, we now can explain why we can see these big structures, this is the slide and why we got this structure and why we don’t see the soil anomaly coincident with the structure, so the key is to actually drill it out. So the little yellow arrows on the plan show how we are planning to drill this structure through the overburden and try and locate this big shares on that hosts for Yalea and Gounkoto to the North and to the South.

Moving on then to just before we leave West Africa, just an update on Senegal, where we are evaluating some 16 new targets in – 16 new targets in the Massawa region. And we certainly had a quite a lot of ounces in the last year, but all very low grade around the gram a ton. So and this is a really part of our draft to pull the resource base capable of supporting this projects development.

And moving on then to the Morila mine, as I said it’s still a performer again this quarter a $50 million dividend that takes a $100 million of dividend this year. We have 20 months of rock temp processing lift and then we all got to be move into the processing of the – tailings and we still evaluating whether it’s worth investing in the pit pushback, but we really need a better physical and tax redeem to do that otherwise, we put too much money at risk for two little return and the government gets or most of us.

Operating results from Morila, I think the pleasing number is that the drop in new unit cost per ounce driven despite the lower grades and that’s the consequence of us starting to mine from marginal waste that doesn’t have any deferred stock power value on it, at the same time, the mine management is also tightening up the cost as we prepared to transform into it and in another talk of business to be able to manage the slim margins of tailings or treatments.

And turning to Tongon mine, you know the focus of the market has been on Mali, naturally, but really operationally, Taiwan is the one that’s really taken up management time as we continued to settle down that operation and get ourselves through some of the key problems. The first one through the transitional we now through that, we have been dealing with an ongoing industrial relations chance, I think we have made some very significant progress this quarter and then of course getting the processing plant to operate consistently.

We’ve had a few issues with the power supply from the grid, we got into a tickle of multiple interruptions relating to an under design capacitor bank at the feed transformer. We’ve not dealt with that. We got a new bank of capacitors on order, but in the meantime we are running two gen sets or up to three as capacitors to be able to manage the voltage spark.

The point I’m trying to show in this slide is really we’ve slowly build up our weekly rates mining, processing rate quarter-on-quarter for in this last quarter and if you look at the April month again we’re pretty well – 300,000 or 10,000 tons a day rate. The drop in the recovery is stabilized and we expect to bring that recovery as we guided in January up back to the sort of upper 80s and 90% over the next two quarters.

So, these are the numbers. Again and again, the key and the driver in dropping costs is really the power of us, we had 90% availability from the grid. Overall power cost per kilowatt hour came down from over 30 kilowatt hour to just on 17, for the quarter. And definitely when we are running the grid on this own, we have done this sort of 11 and 12. And so, and you saw that not only did the impact on our cost and this is what makes Tongon as the lower power cost, it’s really turns Tongon from a very average mine to a pretty attractive returns.

And – as by the way ladies and gentlemen, before we finish Tongon I just want to point out we have provided under this Gounkoto project is Gounkoto has now repaid it’s capital and it will start paying dividend from next – from this quarter too.

Last wise, the Tongon we know we are paying back capital at quite a rate and we expect to run to return the capital for this mine during next year. This is I’m not further upside in Tongon, we have around 600,000 ounces estimated inferred resources within the $1,000 pit shale and we’ve got a drilling program to try and convert that, would be significant within our reserve statement to take our reserves to over 3 million ounces again, which is very significant for Tongon.

And similarly, the expiration teams continue, we have just started getting some encouraging numbers within the – the northern permit to the north of Tongon. And of course, we now fully up and running in on Boundiali permits by about 80 kilometers, 90 kilometers to the Northwest of Tongon and we’ve identified some six regional targets that we will start reporting on from next quarter.

Leaving West Africa then and skipping across to Kibali, I said this morning that running Randgold can be very exciting, that there is nothing like starting a new mine and getting Kibali out of the blocks in January was very rewarding and it’s been an amazing undertaking from Rod and his team to bank that feasibility study and deal was a very different approach that our partners requested us to deliver on as far as internal prices goes.

And we paused that now and really you will see in the annual report that we published in the March we disclosed a lot of the detail of the project and again well on our way we moved about 200,000 cubic meters already where we should have the assay labs up and functioning by the end of May, we have got about 3,000 on site. We are building 60 houses a week in the RAP and we have already started the excavations for the first hydro car installation and the processing plant laid down areas complete, and we are busy with the excavations for the actual processing plants.

During this quarter, we should start the excavations post physical foundations and then the mine will start taking shape soon enough after that.

We’ve got the big challenge this quarter to get the final adjudication of the sharp thinking contractor we are down to the shortlist and likewise with the underground development contract and the group five lead civil and earthmoving consortium is established on site and operating and so DTP and it’s starting to put together it’s equipment kind of start mining in May, the full month, full month this starting to clear and so that’s the open-pit mine.

Moving on in to the next slide is really the summary of the feasibility study. This is for every once clarification. There is more detail in our annual report. It pretty well summarizes the business and then the next one is to give you a heads up on the costs including the acquisition costs and the way we’ve made to try to laid out for you is that the capital costs we’ve divided into really two phases. The first phase is the open pit and processing plant and oil related infrastructure with the first harder scheme effectively takes us to first GOLD.

Phase II run simultaneously but it’s the focus on the underground development and it gets to steady-state by the end of 2015. Peak funding will be around $1.25 billion because we start being able to support our own capital program from internal cash flows into early 2014. And of course the total was everything put together looking out.

Just a reminder and something that are constantly highlighted both for the benefit of our shareholders and also other stake holders and that is that the whole rays on the debt of Randgold is to create value for all stakeholders and when you build mega minds like your body, the benefits are significant for shareholders and countries and just to remind you that when you slashed the case just like you do in West Africa the government gets just a little bit more than 50% of the take after recovering capital.

Moving then as we’ve done in the other projects to the upside on exploration, we got tremendous amount of prospectivity within the Kibali permits and we made huge inroads in understanding our inventory. We now have really three focuses led by different teams and skill basis. The first being the grade control and whole body extension which is part of the mine development in management. We then have a brownfield team which is focusing on evaluating the inventory that’s not in reserve that we acquired for mortar and then we have a separate exploration team Randgold resources exploration team which is focused on generating new targets and also charged with building our own footprint within that region and so you can expect that we will start sharing with you other exploration opportunities outside of the Kibali joint venture.

And really that’s moves me to wrap up in my customary way and we have touched the point despite some of the challenges in the markets. I think the encouraging thing from this graph is the share price performance year-to-date that despite the Mali situation, we are still well within the pack of performance when compared to our peer group. And the second slide really highlights that we’re still outperforming on last 12 months basis.

The key for us is that this is a long-term game, I think there is quite a bit of concern over the Mali situation, I would point to it is a challenge and it’s no doubt of concern to all of us and we are managing it on a very short lead but the key is – for me is that our business is a long-term business, if you look back 17 years the political and operation risk in West Africa is a lot lower than it was then.

We believe and have been encouraged by the response from ECOWAS and the neighbors of Mali and including the civil society within Mali, and we believe that this situation will result itself, it’s going to take some time and we don’t believe it’s realistic to expect that we’ll have a new elections and install a democratically elected government within the next 12 months.

And at the same time, the new appointed government under the constitution is very robust technically based government nonpartisan, and certainly not political and we believe it’s well equipped to be able to manage the transitional period. I think when you know that’s Africa for us. I have always said the risk in running businesses in Africa is not the geography but the way you manage that risk and we’d not to believe that we’re – both our management philosophy and our strategy gives us the competitive advantage in dealing with these challenges.

In summary, ladies and gentlemen, that’s our story for the quarter, good place to be – good sort of foundation to be poling on for the rest of the year and we’ll be delighted to take any questions, if there are any.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And our first question comes from the line of Josh Wolfson from Stifel Nicolaus. Please go ahead.

Josh Wolfson – Stifel Nicolaus

Hi good morning, guys. Thank you for taking my questions. I have got a lot of them, so unfortunately have to bear with me. First off, the lower tax rate in Mali, I guess I had sort of rumored later in the last year, but there was some talk about also increase the steel ownership, has that basically been put to rest?

Mark Bristow

Yeah, the way it works is that they proposed for the future mining, they just proposal lower tax rate, which is what we shared with you Josh, because the ECOWAS community is trying to get everyone in the line and right now there risk of ECOWAS is down at 25%.

That was too biggest state for Mali to take in one, but at the same time, looking on and we have the benefit of being able to accept any improvement in physical regime under our convention. Looking ahead, however, the Mali government has proposed a lower tax rate in a slightly higher royalty for new comers, new comers issue this. And that – and that’s really the – the – we haven’t seen the new legislation of some, it’s in draft form and as you can imagine that legislation will now like until there is a new property constituted in elected government.

Josh Wolfson – Stifel Nicolaus

And any idea where that – that growth rate would be?

Mark Bristow

Between 6% and 9% that’s the proposal.

Mark Bristow

Yeah, but just to reiterate Jeff that wouldn’t supply to us under existing convention.

Josh Wolfson – Stifel Nicolaus

Okay unless I guess it does turn out to be better in which case you have the option.

Mark Bristow

We have the option to. We have a option to take anything that’s better.

Josh Wolfson – Stifel Nicolaus

Okay that’s good. Next up for the Loulo low-grade, what would be your timeline to put that into production?

Mark Bristow

We are saying scoping study by the end of the year and really right now we are saying we should we be ready to push the button towards the end of next year. My big focus right now is that there is a bit of exploration to do and some basic gap analysis which (inaudible). I am just reluctant to take out the both from Kibali in the next three quarters. We really need to get Kibali up and running. The valuation teams under Rob can run this project to that point and then we will make a decision on how we engineer it.

Josh Wolfson – Stifel Nicolaus

Okay.

Mark Bristow

A rough timeline scoping into the next year, end of next year final study.

Josh Wolfson – Stifel Nicolaus

Okay. And I just I am bit confused the original scoping, the original numbers are put out or something like of 7,000,000 ounces at 3.5 and the numbers were looking at today are potentially different. What sort of changed from the last update?

Mark Bristow

Well the unfed resources are underground. The whole 7,000,000 ounces is underground. What we’re looking at is short-term opportunities to expand the plot and so that is still the case extra resource ounces which we’re working on. This separates some of the immediately or potentially available resource that’s not in the mining plan which will be able to feed in expanded plants, and its surface, yeah rather than underground.

Josh Wolfson – Stifel Nicolaus

Okay. And then the resources that came let say 2.53 (inaudible) time and 80 million tons that is in the current resource, correct?

Mark Bristow

Yeah, if you look at the current resources it’s slightly what we’ve done is looked at that we it’s a conservative estimate. It’s designed to stay it is a preliminary economic assessment, Joshua. This is not a feasibility study But when you look at the resources we provided we said if we can get 2.5 grams then we think we can beat that. We’ve looked at the strip ratio at the transport costs and everything else on marginal bases it makes the real return for that sort of capital and that is what we’ve said. Is this something that we should be training time on to see if we can add another 80,000 ounces a year or two, I think in the onset, yes it’s worth the time and we will not take it and put it into real numbers.

Josh Wolfson – Stifel Nicolaus

Okay, and then it looks like I would assume those resources to be incorporated. So a little open pit but it doesn’t appear to be at a research statement that we’re...

Mark Bristow

As a similar resource statements under...

Josh Wolfson – Stifel Nicolaus

Okay.

Mark Bristow

It’s in the resource statements under the Baboto Loulo 3 and all the other bits. Loulo 1, Loulo 2, P 64 Faraba. We took you through that allocation when you were going through it on the resource. It’s a complex trust such that complex open pit complex and its basically all the resources out of open-pit reserve, you will get to that 18 million tons.

Josh Wolfson – Stifel Nicolaus

Okay. And then for the you mentioned that briefly on the calls, the difference between what was actually holding the surface at Loulo underground was processed the great area that was clearly the dilution from the hangwall issue.

Mark Bristow

It was just what we did as we had in one of the levels in Yalea, the main level, the reef drive went off-reef and when we mined, we mind a wedge a large way of – and again we were really under pressure with development and starting right on top of each other and we’ve rectify that, but that basically ended up with some significant dilution in the rate.

Josh Wolfson – Stifel Nicolaus

So some low grade generally from stock.

Mark Bristow

Yeah, that is not dilution.

Philippe Liétard

No, so you will there’s about 290,000 tons was fit in from underground, I think we had about 260, – there is an additional 30,00 tons of low grade in January.

Josh Wolfson – Stifel Nicolaus

Okay. And some of the numbers you put out today for the Loulo low grade opportunity are those similar economics, I guess, you are experiencing today at a Loulo complex that 365 a ton mining and then $20 to $23 processing.

Philippe Liétard

Yeah, that’s correct that are the actual costs

Josh Wolfson – Stifel Nicolaus

The actual processing costs a $20 already.

Philippe Liétard

So just to be clear Joush, the $23 include $3 of – in respect to that material, so the prices – to $20. (inaudible)

Josh Wolfson – Stifel Nicolaus

Okay, and then I guess I was a bit surprised that the Kibali in the number seem fairly reasonable except for the underground mining costs, what was – what was the source there is substantial increase there?

Philippe Liétard

It’s always been around $51, it’s you know we are going to be, I mean we’ve always said that probably a conservative number, but that’s the number that came out from the feasibility. We are – already at that level at Loulo, before even getting to full production. So we are confident that we’ll at least get there and remember as also, a lot of back fold it is – it has come big starting areas, we’ve heard on the conservative side.

Mark Bristow

There is a high end cement components in that backfill there Josh, and looking at around 7% and in the feasibility work and there is also a high fuel costs, benchmark to Morila, looking at around $150 a liter in the Kibali areas, the Kibali, underground cost also contains the development costs to open up that block of ground. So it doesn’t include the capital for the decline and the shaft etcetera, but it doesn’t also include the expense..

Philippe Liétard

Operating cash....

Mark Bristow

Operating development.

Philippe Liétard

That’s just not starting production costs and starting plus developments portion to open up that block ground.

Josh Wolfson – Stifel Nicolaus

Okay. And then in terms of what you are answered with your study state protections are for per ton mining costs a little underground would be – what are they writing at this stage/

Philippe Liétard

With, we are at 51 this quarter and we budget it to get down to the 30.

Josh Wolfson – Stifel Nicolaus

Okay. And then just a last question, thank you for being patient, you mentioned that Gounkoto pit deepening because a portion had been not as deep as you thought was that the jobs that you are talking about or it’s a...

Philippe Liétard

There are two things. We originally thought that we’ve got underground in the south because there was a suggestion that higher grade was going ahead. It hasn’t gone that deep we’ve closed it off. So at this stage it’s not quite in a pit and we’ve not kind of lot under the pit. So it may seems to deepen the first pit in the south. In the north, we got the jog zone. That’s an underground target, the question is what the interface study and where do you put the underground. Geotechnically, it is multiple orebodies, the jog zone. So it requires a little bit more geotechnical work as far as drilling goes. We now confirm the variations of the graves and we now want to a do a little bit more geo technical work and then on the basis of that we’ll design the mine and complete the interface study between underground and open pit.

Josh Wolfson – Stifel Nicolaus

Okay. Thank you very much for taking the questions.

Mark Bristow

(inaudible).

Operator

Thank you. Our next question comes from the line of Patrick Chidley from HSBC. Please go ahead.

Patrick Chidley – HSBC

Good morning, Mark, everybody.

Mark Bristow

Yes.

Patrick Chidley – HSBC

Just a quick question on Kibali on the wind settlement program. That’s to mention those some storm damage and some of the houses and things. And just wanted to see how many people have now moved from the mining site and resettled and how many remain and what sort of outlook source progressing on that?

Mark Bristow

Regarding that 3,900 families or houses we’ve done about 700 and counting 60 a week so that has been our last day. So it’s a little bit more than that. And we cleared the foot print for the main KCD criteria. We had a few more to move recently. We are busy moving that. That’s key for our infill drilling to really keep the open pit program on schedule. We’re still forecasting to complete that project in quarter two next year. With a little bit of luck, we are slightly ahead of plan even though we had to go back and we had about 41 houses that were damaged in various ways from this big windstorm.

It went through the whole region. And then it happens from year to year. What it did to project is highlighted some QA and QC defects in our construction program. What we did is with the community went back oscillated all the issues some of the houses we completely rebuilt, others we just fixed up because there were defects on the roof structure. It was important for us. It got us lot more goodwill with the community. We moved the people out the houses into temporary combination. We fixed the houses and gave them back to them and we’re back on track. So that’s – and we are now at a point where we have 100% of the houses being constructed by – from lease contractors.

Patrick Chidley – HSBC

All right. And also I mean we’ve heard in the region there has been some projects affected by lots of and mine is – that seemed to be manageable. Are you seeing influx of people into the sites, into the area as a results mine or how you’re handling that?

Mark Bristow

I think we just suggest that we do our business a lot different than other people.

Patrick Chidley – HSBC

Okay. And then the other sort of for the – soft issue would be Tom going to mention you’re making progress with labor unions and we did have some problems in the first quarter, has that been going so far this quarter and what do you think is the outlook?

Mark Bristow

I think we had a very following the coup in Mali, we as a team went to deal with the situation in Tongon and it was very constructive. We all sat down, worked through a number of issues. The complication is being educating a workforce that’s never worked before where they are – we recognized the union, we encourage unionization unlike many other companies and the first round of any union incorporation is that people think that the union committee’s only job is to maximize their earnings.

And that’s a realization people have to get ahead around very quickly. At the same time in Ivory Coast, the National Union is very French in the way it looks at what union’s responsibilities are, that’s very different to both our view and government’s view of managing the labor cut. And so we have had a number of engagements in every now and then when the National Union sectary general feels strongly about his view and doesn’t agree with us.

We end up in a standoff which has to be settled. And so far what I can say is in every situation we settled amicably with the help and support of the labor department and the labor inspectors and management, my role is being on facilitating this, I really do believe it’s part of our bolding our social life into is ensuring that we respect – our workers and we come to an agreed negotiated manual agreement on how we are going to operate together.

And we have been through this in Morila, we went through it in Loulo, we went through it in Gounkoto. I’m sure we’re going to go through it in Kibali and at the end of the day the – as you have seen Patrick, our alignment with our workforce in our operations is genuine and real, and I think we will – we pose in the back of this. We got to certainly have from time to time additional challenges but I think we have really got everyone aligned on the importance of getting Tongon to deliver on its ounces.

Patrick Chidley – HSBC

Okay. So and then so far this quarter we have (inaudible)?

Mark Bristow

So far this quarter, we are on the first time we have touchwood 30 days and we are on design 10,000 tons a day. So average that was so – it’s being fought.

Patrick Chidley – HSBC

Good. And just in relation to that maybe I don’t know when the rainy season starts there again that you sort of taking extra precautions this year with asset Tongon and changes of some getting into (inaudible) sort of thing?

Mark Bristow

Yeah, we have just had a workshop program onsite where we have reviewed all the rainy season plans for all our sites. I will remind you that Gounkoto had a real wake-up call last year. I always remind the Malians – one would swear it never rains in West Africa because every year they get this big surprise, when the rains come. But we have put a lot of effort as a management team into planning for the rains that because Tongon is critical because it’s not quieter at a point where that pits is fully flexible.

It’s still developing that we just come out of the transitional zone, just point where it’s mostly drilling and blasting up. And from the quarter is definitely looking like a real one, it’s I’m a lot happy, and we have got it under control. A massive pushback on the rivers will impact out maybe a couple of days, but it is not going to damage us like it did last year.

Patrick Chidley – HSBC

Okay. And then just on construction of Kibali, I don’t know when the rainy season is, can you tell us when that actually has a heavy rain, I mean (inaudible).

Mark Bristow

Heavy rain is in eight months of the year.

Patrick Chidley – HSBC

All right.

Mark Bristow

So we are in that right now. And we are operating quite well. So it’s a different mindset and everyone understands that. So it’s not like Mali.

Philippe Liétard

They have a dry season.

Mark Bristow

They have a dry season and in Kibali and we have a wet season in West Africa.

Patrick Chidley – HSBC

All right. And getting stuff aside from I guess it’s coming from Kenya, is that you’re getting (inaudible)?

Mark Bristow

We’ve mobilized the whole mining fleet while as moving fleet and we’re busy with the mining fleet now and we have had no hassles. We put in that infrastructure that as a whole thing, we are doing it.

Patrick Chidley – HSBC

Right. Okay. And then just one last question on – I wonder if there is any update on these talks about power solutions in the Massawa-Loulo area hydropower?

Mark Bristow

As you see there is a new president in Senegal which we are delighted about, he is actually a geologist Macky Sall and we need to get him a little bit of time to settle his business down, his government down, but we will be added to early on, once I think we – he has got a bit of work to do and then almost (inaudible) silly season in West Africa, because everyone goes to know that, so as soon as we reach through that well will be knocking on his door.

Patrick Chidley – HSBC

It sounds like it’s going to be one, two three years – yeah three years before you get that potentially that low grade trend, that (inaudible).

Mark Bristow

Yeah, I think for us, good to you guys, anyway.

Patrick Chidley – HSBC

If in the meantime, if there is some progress towards getting a low power cost that might be the key to make that stuff really work.

Mark Bristow

And I mean to be really frank with you, we’ve – we’re moving Loulo from 340,000 ounces last year to 500 this year. That’s to begin our step forward, we just got the management team settled. And that’s just real Texas one (inaudible) instead of putting them under – we’ve got a lot to do, we’ve got some additional flexibility and the processing capacity at Loulo who got to get through this average situation suggestion, in the meantime, we’re all to get a run that trade off study and look at the options and the geologist will focus on confirming the (inaudible) to indicated. And then you if at all stacks together it should be pretty quick to get the feasibility study sorted. But I’m reluctant to put that unreasonable pressure on the team right now, I want to see Kibali ready on top on things and it’ll be great to see another two quarters of Loulo delivering on its budget.

Patrick Chidley – HSBC

All right, okay. Thanks very much.

Operator

Thank you. We have a question from the line of (inaudible). Please go ahead.

Unidentified Analyst

Hi, Mark.

Mark Bristow

Hello (inaudible) how are you.

Unidentified Analyst

Good you?

Mark Bristow

Well, I’m good, thanks.

Unidentified Analyst

Okay, how’s your back by the way.

Mark Bristow

Fine.

Unidentified Analyst

Oh good. In your quarterly report you would note that you set up a separate entity for Gounkoto.

Mark Bristow

Yes.

Unidentified Analyst

However, I should pronounce it. And you used the word, I forgot what word you used but will there be no taxes for two years at all and with it?

Mark Bristow

Correct.

Unidentified Analyst

Zero?

Mark Bristow

Zero.

Unidentified Analyst

Okay, I wasn’t sure, what and you can extend that five if you?

Mark Bristow

As we find that you know we got a – that the trigger is anything we have to tax more than a 100 million in capital.

Unidentified Analyst

All right, I got you. Okay, that’s it.

Mark Bristow

Thank you.

Unidentified Analyst

Thanks.

Operator

Thank you. (Operator Instructions) And we have a question from the line of Angela Tindyebwa. Please go ahead. Hello, Angela your line is live. Would you like to ask a question?

Angela Tindyebwa

Good morning, I’m calling on behalf of Nana Sangmuah .

Mark Bristow

Hello Angela.

Angela Tindyebwa

Hello, and I have a question on Loulo, what’s the mix of open-pit and underground that you’ve seen in the second half of the year?

Mark Bristow

The mix this quarter was 70:30. The mix that was slowly that under you see, we showed the mix Loulo and Gounkoto but Loulo itself the mix will be around 50:50.

Philippe Liétard

We are expecting, the second half it’s really when you start purchasing (inaudible) of 675,000 tons. And then the underground is about 1.9 million tons for the year.

Mark Bristow

Processed.

Philippe Liétard

Processed to I’m sorry, guys. That’s on the mind so, you know, so.

Mark Bristow

So we you have to look at purchase.

Philippe Liétard

And.

Mark Bristow

And we are just doing the calculation.

Angela Tindyebwa

Thanks.

Mark Bristow

It’s that – I’ll just work though it to you first quickly. There are enough stockpiling or anything. There are how many ounces of that underground, I mean – the underground ounces Well, first of all the open pits answers from Yalea.

Angela Tindyebwa

5 grams..

Mark Bristow

So we’ve got two (inaudible) it’s about, 50-50.

Angela Tindyebwa

50-50.

Mark Bristow

Yeah.

Angela Tindyebwa

And in Q2, there will be mainly an underground connection, right?

Mark Bristow

Yes, Q2 is underground. If you look at it over the year, 50% of the gold production will come from Gounkoto and 50% will come from Loulo. Of that 50% in Loulo, it will be nearly 50-50 again from underground and open pit.

Angela Tindyebwa

Excellent. And on Gounkoto, what’s the sequence of grade you’re looking at for the second half of the year? So I understand at the at the beginning, you’re still in the lower grade zones but how does that progress?

Mark Bristow

Absolutely. So Gounkoto grades for the second half of the year will be around 5 grams, for quarter three and quarter four.

Unidentified Analyst

Excellent, okay. That’s it from me. Thank you.

Mark Bristow

Thank you, Angela.

Operator

Thank you. (Operator Instructions) We have no further questions coming through. I’ll hand the call back to your host for any closing comments. Thank you.

Philippe Liétard

All right, ladies and gentlemen. Thank you very much for your time again. I hope you’ve find it useful and certainly can go away with the understanding that we’re still operating as we got at our shareholders throughout this last quarter. And that we – at this stage believe we’re on track with our business plan. If there is anybody who would like to follow up with the team we are available and otherwise just you can drop us an email, we will make sure that we pick up with you during the next week or so, because tomorrow we’re pretty tied up with continuing to see our shareholders in our London. But we will be available for calls throughout next week.

Thank you for your time.

Operator

Ladies and gentlemen thanks for attending for today’s conference. You may now replace your handset.

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