Gold Resource's CEO Discusses Q2 2012 Results - Earnings Call Transcript

| About: Gold Resource (GORO)

Gold Resource Corporation (NYSEMKT:GORO)

Q2 2012 Earnings Call

August 10, 2012 11:00 AM ET


William Reid – CEO

Jason Reid – President & Director


Welcome to the Gold Resource Corporation second quarter earnings conference call. Gold Resource's CEO, William W. Reid will make a brief statement. Following Mr. Reid's opening remarks, there will be an email Q&A period. In order to efficiently respond to as many conference call participants as possible. The company asks callers to email their questions to during the conference call. Management will address submitted email questions during the Q&A portion of the conference call. Email question format should include the individual's name, organization type such as institution or individual investor and your question. This call will be recorded and posted to the company' website within three to five business days. Please go ahead Mr. Reid.

William Reid

Thank you. Welcome to Gold Resource Corporation's second quarter conference call. Since we began mining the underground high grade La Arista vein system, we have been progressively increasing our production. This second quarter however was not a record quarter like the first quarter. The market's response was brutal, but in my opinion overblown. That we reduced our production targets for this year to a range of 100,000 to 120,000 precious metal gold equivalent ounces, about a 16% decrease, achieving the 100,000 level this year with the 50% increase over last year's production. Building the company at a rate of 50% per year is a rare and positive achievement that I believe will be appreciated and rewarded by the market. The market's response also underscores the problem with short term thinking. Quarter by quarter obsession is problematic versus the reality of building the business which is longer term.

Any business, particularly an underground mine is a long term endeavor. We have demonstrated our ability to build and to execute. We have aggressively built the La Arista underground mine and have a strong cash flow to show for it. Even with half our targeted mill production this quarter, we achieved a great deal. We were profitable for the second quarter. We produced more gold than Q2 of '12 than we did in Q2 of '11. We paid for significant and increased development underground. We bought 1.3 million with gold and silver bullion to diversify our treasury. We paid the Mexican government, $8 million in estimated taxes. We paid the owners of the company, the shareholders 9.5 million in dividends. We accomplished all this and still added about 775,000 to our bank account this quarter over the cash we had in the bank at the end of last quarter.

Now, if we can do this with a quarter that is less than half our targeted mill production, consider the cash we will accumulate with achievements of our targeted quarter. This speaks to the cash generating power of this deposit and this project and with increasing cash; this management has certainly demonstrated its bias for distributions to the owners. The company has distributed dividends to the owners, the past 25 consecutive months and thus far, this year, had distributed about 33% of our cash flow from mine site operations. The company remains fully committed to dividends.

I had consistently stated on our conference calls and elsewhere that production is and will always be dependent on the development of the mine. An underground mine is by definition a challenge of constant development as you constantly mine. We have carried out these grueling demands since the beginning, they are not new and they will be with us till the end of the mine.

Now one of the main questions criticisms we have heard is why did you wait until after the quarter ended to release the lower production figures. Well we certainly did not expect going into this quarter that we would produce half of what we targeted. We had just come off our best quarter ever in Q1 primarily as a result of having developed strokes in our high-grade areas and we had seen days where the mill head grades were seven to nine grams gold or and 700 to 800 grams silver. When you have those kinds of days they can drastically increase production of metals for the month and ultimately the quarter in a short period of time. so even if the first month or even two months of the quarter of the low target, it is a fact that if you can bring in high grade to the mill for even one month, you can make a big difference to the quarter overall.

We were working on developing additional stopes in our high grade areas. At any point, had those stopes been able to come online, they would have changed the quarterly numbers drastically. It would have been incorrect to prematurely state we were going to have a below target quarter and they come back with the quarter that was not or not much low target. This is why we will only report quarterly reset our targets that because of the unpredictable nature of mining and especially in the new mine without much history, nobody knows in advance what the actual results will be. We expect to meet our targets more often than not but it is a fact sometimes we will not. As we have done with previous quarters, we announced our preliminary production as soon as we had finished the quarter and got comfortable with the calculated preliminary numbers.

Now the deeper we go into the mine it requires increased ventilation, increased power distribution and handling of increasing water flow. In the second quarter these issues took on unexpected and above average proportion of effort as this also impacted the safety of our miners and our employees. Safety will always come first and foremost before pushing for production. Because of this situation, we mine some areas of the recent deposit that were known to be low-grade zones but were safer areas of the mine while we diligently work to bring our high grade stopes into production safely.

I'm pleased to report we are now back mining from development stopes in higher grade zones primarily between levels seven and ten. I can state that our production is going to more of what we expect. But even given that, we cannot speak to what the quarter will actually be. We will not be giving daily reports or monthly ports, we will only report quarterly.

Let me take a minute and comment on another area of questions of possible misunderstanding which is our total cash cost for this quarter as it relates to our production. Though at $509 per gold equivalent ounce it seems high. You should know that our cost at any point are relatively fixed. So if you produce 15,000 ounces at $500 an ounce had you gotten 30,000 ounces in that same quarter instead which was our target, the overall cost won't go up much but you divide the same pool of cost by 30,000 ounces which would mathematically in this example be producing a gold equivalent ounce for $250 per ounce. We expect to produce more ounces in Q3 and expect your cash to drop accordingly.

As you know we have had a full-time CFO since May 2012, Mr. Brad Blacketor. Brad has got a wealth of experience in the mining business and professionalism to our company with which I am very pleased and impressed. If you remember, we changed our approach from stating cash operating costs which excluded royalty to total cash costs that does include royalty as this was more in line with the industry. We have this quarter also changed our total cash cost per gold equivalent ounce cash calculation to reflect ounces sold instead of milled ounces produced as we believe that this likewise is the more common presentation.

Just for clarity our ounces produced which are the ounces the mill produces will never be equal to our ounces sold. The reason is that the smelter as far the best takes a small amount of the metal to our ounces sold our net of that smelter charge. Our revenues are based on ounces sold.

Let me shift focus here. We have been telling you from day one we have a great high grade deposit. Now with the publishing of an independent resource report on July 23, 2012 by the engineering firm of Pincock, Allen & Holt our high grade deposit had been confirmed. Pincock, Allen & Holt states and I quote; Gold Resource Corporation has identified a significant precious metals and base metals at the thermal deposit in Southern Mexico. And they go on to state that in Pincock, Allen & Holt's opinion the exploration investigations by GORO in the (inaudible) project are carried out according to industry standards. The engineering report prepared by Pincock, Allen & Holt was done to the Canadian National Instrument 4/31/01 requirements and conforms to their guidelines and regulations.

Let me refer you to the summary of resource estimate in table 14-16, if you're interested in looking at it. First, in order to calculate the resources of a polymetallic deposit, in our case where we have bible minerals gold, silver, copper, lead and zinc, it is necessary for the resource engineer to convert for calculation purposes only, an equivalent value of all metals for each block in the model so that a gold equipment cutoff rate can be used. Even though the table gives gold equivalent ounces considering all metals, this is the way they needed it to be done. Let me be clear, we are not using this polymetallic gold equivalent number. For our resource and production purposes we only look at the gold and silver values at our gold equivalent value and the base metals are our byproducts. Each can be calculated separately from the information in the table.

I am inclined today to focus on the time given in the table which then give us the theoretical life of mine. On the table if you take the one gram gold equivalent only cut off the indicated and inferred are combined about 4.48 million tons and approximate two grams per ton gold and 200 grams per ton silver grade. With a maximum mill throughput of about 1,250 tons per day that would be 18 year life. So at the lower cutoff grade we have a deposit would have 18 year life. However we're not interested in that low cutoff grade. We have chosen a nine gram cutoff grade. At the nine grams per ton gold equivalent cutoff, the combined tons equal about 1.7 million times an approximate 4.6 grams per ton gold and 430 grams per ton silver or about four years at the maximum million rates.

Now what is interesting is that they were able to compare what we mined up to the time of the report pretty much to the model reconciliation if you will and they state that their model underestimated by 24% percent the gold equivalent ounces. When mine is program that their model effectively adds about one year making the mine life possibly five years at the nine gram cut off.

So how does this independent report compare to our original model? At a slightly higher cutoff grade ours was done at 9.33 grams per ton. The company's estimate had 2.9 million tons or seven years. Now Pincock, Allen & Holt was more conservative with the distances they allowed in other words not letting a drill hole influence be as great as ours and that is what basically makes the difference of our seven years versus their possible five years. To me it is a pretty close comparison.

Even more impressive to me was our silver grade was 506 grams per ton and Pincock, Allen & Holt's the indicated rate with 500 grams per ton that truly is a similar and impressive resolve for approaching the data in two totally different ways. It's also important to remember that La Arista deposit remains open adept along strike. We are confident we will have significant ounces with continued drilling of the deposit.

so again I will state, an independent engineering study of our resource confirms the high grade nature of our deposit and under more stringent parameters they come up with an estimated possible five years where comes up with seven years. Each of these is an estimate and as estimates go neither is wrong. We are very pleased with the results confirm our deposits.

There are certainly critics of management and management's philosophy applied to the business of mining although the high grade deposit question should now be eliminated, that is fine as I would stipulate the management and management's philosophy do make all the difference. But if you're going to make an investment in the gold space all you have is the ability to compare and contrast and then choose among a peer group of companies.

I believe you will be hard pressed to find a more shareholder friendly company. Your company with a combination of both growth even if the growth takes a little longer than initially targeted and paying a meaningful dividend, essentially paying while you wait for that growth. Management remains focused on benefits for the shareholders as it has since day one by being very disciplined on capital structure. A producer with only 53 million shares outstanding is a rare occurrence and mismanagement has repurchased some of its shares on pullbacks knowing this benefits all shareholders.

In July of this year we purchased another 83,000 shares. We have as one of our underlying principles to get into production as quickly and a minimum capital as possible to limit shareholder dilution and we did. Compare the shareholder focused approach with many peer group members that are quick to sell more shares in to the market to top off their treasury as it's called or live off constant equity financing. Our focus has always been on superior returns for shareholders by focusing on high grade deposits as they have higher cash returns. To us it is not about going after the maximum number of ounces in the ground or even the maximum number of ounces produced. It is not about ounces for ounce sake it is about ounces that actually make most the money. Few our ounces that make more money is what we are all about. I just a moment ago mentioned how we are foregoing the one gram cut off so that we have a much more productive mine.

Our philosophy focused on paying back the capital to build the project that capital b what was required to begin revenues in one year and we did that. A vivid demonstration of efficient use of capital. Compare this with the industry that focuses on maximum ounces in the ground. The way you maximize those ounces is to keep lowering the average grade. Today mostly lines are sub one gram but they require large capital expenditures and margins are thin. The consequence of that philosophy is that those companies cannot do much with shareholders.

They cannot do much for shareholders from a cash standpoint and generally have unimpressive return on capital. In other words not very good use of shareholders money. We are here to focus on shareholders return for the long run. We focus on cash and cash returns. The ability to return as much cash back to the owners as quickly as possible. This management and the company may be the only ones to declare a dividend back to the owners the first month of declaring commercial production and we have paid a dividend every month since then and those payments back to the owners now total about $53 million dollars. This management also believes in its products gold and silver and in order for those shareholders who equally believe in precious metals to benefit from being a Gold Resource shareholder management wants its dividend conversion program into gold and silver bullion. I know of no other program like this.

Now we are in the mining business, one of the toughest businesses out there. We extract minerals from the earth so we deal with Mother Nature and sometimes she can be difficult. In the end we will prevail but timing is hard to predict. As one of the largest individual shareholders, I am impacted greatly and I am not happy. But I am neither concerned or worried we have a great deposit. We have a tremendous property position with a lot of potential for more deposits to come into the pipeline. We have demonstrated they can generate a lot of cash and we are growing. so if you believe we have a great deposit and now we're not the only ones saying that and you appreciate this management's philosophy and you have witnessed our ability to execute far more often than not, I believe finding an equal peer group member will be difficult.

So now let me open this up for questions and I have Jason Reid with me here and we will be working together to answer your questions.

Question-and-Answer Session

Jason Reid

Good morning everyone. We're going to jump right into this. We have a lot of question to get [Audio Gap] Sterne Agee.

Unidentified Analyst

You have been mining deeper since you encountered ground water in the second quarter. Are you seeing ground water deeper in the mine at level 10? What possible alternatives is growth studying to encounter any excess ground water in this future?

William Reid

Okay, it's pretty much math as we go deeper we are going to encounter more and more water. The water comes down through the earth two fractures and those same fractures where our order deposit was formed. So every time they cross cut over to the vein, we encounter the water pretty much coming out of the vein systems. So what we've done on this particular period of time, we dealt a bigger pond on level 11, we've had to get bigger pumps and we are looking at a near term solution on level 11 to drain the upper level. More long term we have a long additional decline going up to the south. The reason we're going off to the south is to encounter the ore deposit on the south edge so that we're basically mining on the northern part of the ore body. Once that long dress rather gets to the south side of the deposit. We will have the ability to mine over there and that will help increase maybe even double our production tonnage out in the middle at some point. But what we're going to be doing is not cross cutting every level right now. We're on level 12, we're going to 13, 14 and also this long drift will come back in under on about level 14 or 15. We will then set up and be prepared to drain the water from that level so that those levels above will be drained when we're ready to mine them. So it’s a very extensive development program which we are undertaking and going on as we speak.

Now another aspect with water and its increasing when we go with depth. Is this water has CO2 gap that emanates from this fractures in the water. Now CO2 gas is not lethal. It's not dangerous from the standpoint of drinking it. However, CO2 is heavier than air. And so it's known and it does displace the air therefore the oxygen and air is where it stagnant or lower. And that's why their relations has become so much of an importance. Because of the CO2 we have, greater ventilation demand. We didn’t have CO2 on the upper levels but as we go deeper, we have more. So these are issues that are common with a lot of differed mines. We are encountering them and we have to address both the water and the CO2 which is also the ventilation at any point in time. And we now have a plan that we think long term will address the situation.

Jason Reid

Okay, second question from (inaudible). Can you provide a breakdown of cost, milling and mining cost per ton for the quarter? Are you seeing both productions and costs at normal levels in August?

William Reid

Okay, we didn’t break down the mining cost and milling cost in this particular queue. But we will in the next one and we'll probably have that in each quarter thereafter. Certainly and I'll address the fact that you can see that our costs are up for this quarter. I might mentioned that we have hired a lot more people. We hired additional contractors to help us. We have actually upgraded our staff. We have a new mine superintendent. We have a new male superintendent. We have a new safety superintendent. So when the process of adding a lot of experienced people and our cost have come up with the adding of a lot of more production people. So I think we will have a leveling off of the cost and actually maybe even a decrease as we get more optimized.

Jason Reid

And the third question taxes, can you explain in detail how taxes on repatriation worked for GORO historically and how that would change in the future? What should we think about future effective tax rate?

William Reid

We've been able to transfer money from (inaudible) back up to the United States. First of all, transferring the money is not a problem but from a tax standpoint, we up here in the US, Gold Resource provided funds to the Mexican subsidiary through loans and as long as those loans were being paid back and there was no tax implication. But basically we paid those back and so now when we distribute, when we send up money to the United States to pay our dividend it is now taxed by the United States also. So as I mentioned, this quarter we paid $8 million to Mexico. I don't have the exact number but we paid some money to the United States taxing authorities or basically will be. So consequently what we have is taxes are so confusing and especially you are dealing with international taxes that a lot of this has to be based on estimates and this particular quarter we changed some of our estimates and so you will see that we have like a 55% tax rate. That's not normal but long term and I think we'll be for this year; we will be at about 37, 38% tax rate. So for those who like taxes, we're paying taxes to the Mexican government, we are paying to the United States government.

Jason Reid

Okay and fourth quarter. It seems management has been exploring possible acquisition targets. Have you come across any interesting targets? What kind of assets are you looking at country size, early late stage Gold polymetallic? I'll pick this one.

Our focus will remain on our recent deposits first and foremost. We expect to be here a very long time but having said that, we have been and will be looking for opportunities mining friendly jurisdictions. Ideally they would be immediately accretive but we will look at each opportunity for what it could potentially provide. On a spectrum of early Greenfield opportunities on one end and producing assets on the other, we will mostly fall within the first, third of that spectrum towards the early exploration stage and we would be targeting gold and silver ideally with a base metal component to help offset costs.

William Reid

Let me just add one thing there. I think we'll go after a minimum of 100,000 but 100,000 – 150,000 additional ounces from the next project, obviously we'd like more but that would be probably the minimum.

Jason Reid

Our second question is from Jerry who is an individual investor. Question, will quarterly or even annual forecast be as explicit as they have been or a little lighter and directional forecast be used.

Jerry, with all the moving parts and variables, operating a mine, it is difficult to target production levels, especially the junior producer with one mine operating. We are in early development of not only the recent mines of the companies in general and I want to be clear, Gold Resource does not give guidance. That's for major producers with multiple mines; they are better suited to give guidance. We give targets in gold. So we set a production range during the year to help account for variables in the mining business and there are many of those. So that range that we set may go up or down throughout the year depending on development and as we see it moving forward. And we still target 120,000 ounces this year and moving on to 200,000 ounces of precious metal gold equivalent in the future. Now when did that 200,000 ounces happens in 2013 or 2014, it's too early to call at this point. Again, when we finish each year, we plan a set of new range for the following year based on mine development. Now as the low end of the current range as Bill mentioned, I want to reiterate this, it’s a 100,000 ounce gold equivalent range and again that may change but that's where we're currently going after. That still represents again a 50% increase from last year. Now that's a great growth production profile going forward and we can't understate that enough. We don't need to push it beyond that.

Third question, also an individual investor. His question, please forgive me if I have gotten the numbers wrong but last update your exploration budget was set around 10 million for 2012. But during the first six months, it appears you have not spent very much of this money. Does this mean exploration will be a significant increase in the remaining months of the year? Are you still on track to drill Las Margaritas this year?

William Reid

Let me take the first part. I want to clarify because the semantics in accounting sticks a tail in here. We need to talk about exploration. From an accounting point of view, exploration is not at the La Arista deposit. Now this is out in a minute. Exploration is outside of the La Arista deposit. I think that we actually our estimate in our filings said it was like 7 million for exploration in 2012 while we spent 3.6 thus far so we're pretty much on tract that we spent half the money in the budget for outside their La Arista area.

Now, the LA Arista area is not really considered technically exploration because what you're doing is infill drilling and expanding the ore deposit. And so that falls from an accounting under the development of that deposit and that gets put in the construction and development line. Normally would be capitalized but that particular like for us we also expense. But there is a break down between what is exploration that's outside the La Arista area and what's development which is expanding the La Arista deposit and we have three drills underground. We have a drill on the surface and we really don't have a fixed budget. We just will continue to drill and continue to drill with that.

Jason Reid

Okay the second part of your question regarding Las Margaritas, we finished the access road and are preparing to drill roads and pads in preparation to drill. I believe this property is the dark horse in all our properties here. It has historic mining on a pre-Mexican revolution time frame in which they built the town surrounded by various small mines and added. We have substantiated the high grade gold and silver potential, the potential was mentioned in the Mexican government publication called the mines in Mexico and we believe will be the first ever to drill it. I personally think good things will come from this exciting property and we're trying to get a drill there as soon as possible.

The next question from Scott (inaudible) individual investor. On May 10th, the company maintained its 2012 production guidance, 120,000 to 140,000. As stated by Bill Reid, mentioned challenges with respect to electrical ventilation and trucking issues. He also mentioned there would be times when production grades would temporarily be lower. Why did the company maintain its production guidance nearly halfway through the quarter when the production issues had led to lower 2012 production guidance, we're already well known.

Bill talked about this in the conference call but the answer to this, as Bill mentioned that his statements was one month of peak operation while processing high grade stopes can drastically change a quarter's outcome. So it's another way to answer that question is the recurring theme here. We are going to report on a quarterly basis going forward.

And then the second part of your question is, is the company satisfied with the way it announced lower 2012 production guidance.

The answer is yes, when the quarter ended, we targeted the preliminary numbers are prepared and announced them when we were comfortable with the preliminary numbers. We did not expect them be as low as they were. But we could have waited till yesterday to announce them. So we did the right thing by announcing them as a preliminary before they were officially due just like we announced preliminary numbers in the first quarter. Our production numbers again will be announced on a quarterly basis.

The third part to your question, since starting commercial production in 2010, the company has lowered production guidance on several occasions. Are there any issues you know of? How it can lead to further downward production guidance?

This is a mining business. Little goes as planned. We may lower or raise our future targets depending on what challenges lie ahead. We've been criticized for lowering our production targets a few times since 2010. I will take that criticism as the big picture illustrates our ability to reach production. We are on track to increase that production substantially year-over-year regardless of the lower targets and we have put the company in unique position as Bill mentioned, as the growth in income equity at the same time with our substantial must be dividend. Again, I'll take that criticism any day that we and I all our shareholders collect a monthly dividend, as we consistently grow the company for the long run with our current targets being 50% plus growth profile. It’s a growth profile.

Moving on to the next question by Harvey (inaudible) an individual investor. Exactly when did management know about the second quarter problems? If it was something during the quarter, why did management chose to be silent and tell well after the quarter end?

Again, the same theme, it's probably the last question that is being answered, but to answer it another way, every quarter has its challenges. Some routine, some unique. We had some good days in the quarter, we had some not good days in the quarter and we had higher grade stopes come on line in the end of the quarter, it may have changed the quarter drastically. That did not happen. We released the preliminary numbers as soon as we had them, again prior to the recording day.

The next question by Brad (inaudible) individual investor. How are your grades in the additional deeper drilling in (inaudible). Are they staying consistent or improving their steps?

William Reid

Okay, we really haven't got to the point where we have been drilling deeper. There has been a lot of need for our drills with regards to help the miners and secondarily just because of the problems with the development since last quarter, we are in a position to put a drill station on level 10 which will really be the platform by which we will drill the depth extension of this deposit. We were hoping to get that done much earlier than we have. It's not quite done yet for the various reasons that I mentioned sterilization water issues. Once that gets done, then we will start drilling the depth extension. Now as far as the mineralization goes, we are pleased with what we see when we are in the areas that the model says will be high grade, they are high grade. And when we are in the areas the model said, there will be a little less, they are a little less. So all in all and I think it's very informative that Pincock, Allen & Holt, when they compared our actual mining to their model, which believe me that's a much better indication than even measured resource to actually be able to compare, their model was $0.24 precious metal lower than what we actually mined which is very positive. We have a high grade deposit and you will see the impact of that over time.

Jason Reid

Second question, Harvey, have there been any positive drill results on any of the other projects?

I'll take this one. We have drilled several good mineralized though small veins under the open pit, Harvey. We don't feel we have intercepted the feeder vein that is (inaudible) open pit or if one of those is the feeder vein, it may open up a depth. We know that the potential feeder vein could also be offset by or rather distance from the pit location and it may take a while to find it. Now at (inaudible) most holes that were previously drilled, hit the structured mineralization we were targeting. We need to digest that information and follow up with another drill program. I did mention Las Margaritas. As far as Al Ray, we think we're making good headway with everybody involved there to be back there in the near term. I can't give you an exact day, we don't know but we like what we're seeing so far.

The next question by GC, no individual investor. In Q2, the company mils about 15,000 tons less than in Q1. However in Q2 production costs applicable to sales increased about 12.6 million. Why did production cost increase so dramatically when tons mill decreased by quarter? What's the specifically drilled increase?

William Reid

Well I've alluded that before, but let me try again to be a little clear. We have a mill and we have the people staff for that, when that mill's running and use electricity, it uses all that, all the different types of utilities that we have etcetera, air, water. But that's kind of a fixed cost. I mean if you were to only run small amount of tonnage through that mill it doesn’t lower your cost, it actually raises your cost per ton milled. So essentially we have fixed cost at the mill at any point in time and then when we've upgraded the staffing at the mine, we have basically increased the overall fixed cost down there. So as I gave them my example, we pretty much have these pool of costs, if you only run 15,000 tons through there and the cost of 500 if you are able to run 30,000 tons in that same quarter, you'd have about $250 cost. So we expect our cost to go down as we get back or production going up.

Jason Reid

(Inaudible) has another question, will management reaffirm guidance of the 100 to 120 for this year and what is management projecting for 2013?

We mentioned that already. Yes, we are reaffirming it. Again, our long term goal is going after 200,000. Whether we can do that in 2013 or 2014. It will happen in stages, but we are not going to nail down the exact amount. Again, each production year will have a range that around that. And we'll adjust accordingly.

Next question from Jim Reeves (ph) individual investor. Page 146 of the 4/21/01 shows a projected 52,000 meters drill samples in 2012 at a cost of 7.7 million. The last skew shows here to date exploration expenditure of 3.6. How many meters of drill samples have been completed in 2012?

William Reid

First of all that number that you got of the Pincock, Allen & Holt report is an estimated budget. That budget doesn't look at from an accounting point of view. About half of those meters are at the La Arista deposit and so you don't see that in the exploration number as I mentioned before. I can give you as I said here, how many holes we've drilled here or meters we've drilled and the deposits. But so it's really a combination and so the numbers don't really fit that at this point in time.

Jason Reid

All right and another part of his question. The 719 PR stated that the stope percentage for Q1 was 55%. What stope level was milled in Q1?

William Reid

Okay, a little bit of confusion over that. We gave the high and the low, basically if you look at the production from stope in Q1. It averaged 40% if you look at stope in Q2, it averaged 20%. So basically about half. In addition, we were actually in the second quarter mining some of that from lower grade areas. So that's the actual numbers.

Jason Reid

Another part, another question, stope levels mined in Q1 was a little on forth but mostly…

William Reid

Yes, it's just what stope level are we…

Jason Reid

Yes, what stope level are we on?

William Reid

In Q2 we were pretty, we had finished with the stope from level four, five and six which we had finished by the end of the first quarter. So we were attempting to get stopes on eight, seven and six, a little bit left on six.

Jason Reid

This question says, what stope level is presently being mined in Q3?

William Reid

We're still on seven and eight at this point in time but we're also developing all seven through 10, right now.

Jason Reid

The 10-Q for the period ending 3/31/12 listed 134,000 ton of stock piles. I do not see a similar statement for the second quarter 2010. How many tons of stock pile were on hand as of 6/30/2012. The tonnage of stock pile was basically the same at 134,000.

William Reid

Yes, you're right Jason. It was 134,000 and just the way the accounting works is that in the interim financial statement we only have to update footnotes to the extent that there was material change when compared to the end of the audited period. Inventories did not materially change so we didn’t have to give basically the same number.

Jason Reid

What was the limiting factor in milling 659 tons per day in Q2 versus 825 tons per day in Q1. It's just a function of ore coming out of the mine. You said that all along.

William Reid

Yes, the mill can do up to 900 tons a day right now. But we just have a lower production out of the mine for various reasons.

Jason Reid

Bill (inaudible) individual investor. When do you expect to achieve zero cash cost? As we now longer expect to product at zero cash cost. Those were early potential targets. We're fortunate to have base metals offset our cost and whether we ultimately end up at 200 or 300 total cash cost, it includes royalties we would still position the company in the low cost peer group.

Jill Hogan individual investor. Your statements indicate that constructing and development expenses are going up. What is your expected budget for construction, development and expenditures for the foreseeable future.

William Reid

Basically this is, right now the construction development is primarily the underground development and we're probably spending between 2 million and 4 million a quarter on that and it will probably fairly be consistent for a while. We also continually optimize and increase the ability of the mill so there will be a little bit from that. But that's what I would say right now, pretty much 2 to 4 million per quarter.

Jason Reid

Chris Willis. There was about a $6 million increase in production costs over Q1 on few ounces. What is the cause of this large increase? Are the costs for improving ventilation of electric or exception including these costs or in the approximately 2 million increase in construction and development costs? Will this trend continue?

William Reid

I certainly alluded already to the fact that we have increased the number of people. We've increased the management and so our cost have gone up. However, with regards to your question concerning the construction and development, as a general rule, most of that will go into the line having to do with the development. However, if there are things that we are doing that won't last 12 months, in other words we've only used that for less than 12 months, even if we are putting in ventilation or piping or something and we won't use that over a 12 months period. Then I get to actually put into our production cost and so we have some of those also.

Jason Reid

The second part of that. Who's job was it to address water ventilation or electric issues and why were they not addressed in a proactive rather than reactive manner. These are not new issues in mining then why were they not anticipated.

First, Bill talked about this Chris. The water issues, we know we were going to get water into water issues. We had plenty of pumping stations. However, we had increased water coming out of these veins. So in response to that, we designed during the quarter and are constructing a larger pumping station. So it is mining. None of this is out of the ordinary.

James Washington, individual investor. The company reports produced and sold ounces in the future periods, which will be higher?

William Reid

As I mentioned, produced ounces are what the mill actually produces. What we actually sell however is a smaller number. I know there's been some confusion. People say, well look at their production and look at what they sold and there is a difference. Yes, there is a difference and there will always be a difference because our revenues are defined by net of smelter charges. That's what our revenues are. We use ounces sold. Now ounces sold really because the smelter takes a small portion of the metal as part of their fee, our ounces sold will always be less at a given point in time than our production. However, that doesn’t take into account inventory. For instance, we did pull out of inventory ounces in the second quarter. So we can't really say, depending on how the inventory goes, we might sell more ounces than we've produced. But as a rule, but that coming from inventory. Whatever we produce, the ounces that we sell from that will be a little less.

Jason Reid

I know we're overtime, we're going to do two more questions. (Inaudible) Ruth, I am an individual investor. Please provide an update on the number of shares that were disposed by management year to date.

I don't believe any management have sold any shares this year.

William Reid

Once again, management has not sold any share this year. If they did, you would find that in the filing. As I mentioned in the last conference call, I did dispose of some shares but not through sales, through gifts, for state planning purposes and that's in the financial reports that we have to file with the SEC. but those were gifts and for a state planning purposes, they were not sales. Management has not sold any stock.

Jason Reid

The final question, we apologize for not getting into anybody else's questions, we'll circle back with them individually. Kerry (inaudible) Capital Advisors. Given that you have a 43101 report, do you plan a Canadian listing? What might be your timing and/or other requirements to list in Canada?

Canada is in our short list. We are looking at other venues as well for a secondary listing but we are actively moving in a direction of a secondary listing. I can't give you a timeframe on that but that is still one of our goals.

So we've over time here. Again, we thank everybody for joining the call and we will do our best to circle back to get to the other questions that we did not to here.

William Reid

Okay. Thank you very much.

Jason Reid

Thank you.


And that does conclude today's presentation. We thank you again for your participation.

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