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

| About: Great Basin (GBG)

Great Basin Gold Ltd. (NYSEMKT:GBG)

Q2 2012 Earnings Call

August 15, 2012 09:00 am ET


Ron Thiessen – Chairman & Director

Lou van Vuuren – Interim Chief Executive Officer

Patrick Cooke – Director

Dana Roets – Chief Operating Officer


Josh Wolfson – Stifel Nicolaus

Craig Gilbert – Linden Advisors

Tony Sonn – Private Investor

Jonathan Guy – RBC Capital Markets


Good day, ladies and gentlemen, and welcome to the Q2 2012 Great Basin Gold Earnings Conference call. My name is Jeff and I will be your coordinator for today. (Operator instructions.) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. Lou van Vuuren, Interim CEO. And you have the floor, sir.

Lou van Vuuren

Thank you very much, Jeff. Good morning, ladies and gentlemen, and welcome to Great Basin Gold’s results presentation for Q2, ended June 30, 2012. I trust that you were all able to retrieve the information and its supporting documentation from our website or via email. If not please email Michael Curlook or any member of the team and I am sure you will get the information quickly.

I am being joined on the call today by Ron Thiessen, the Chairman of the Great Basin Gold Board as well as Patrick Cooke, who is the Chairman of the Audit Committee as well as the Chairman of the Special Committee of the Board; and then also Dana Roets, the Chief Operating Officer and other members of the current management team.

On Slide #2, this is the customary disclaimers slide about the Canadian resource and reserve terminology and forward-looking information. You obviously will have seen it before and a copy is also available on our website together with the slides. I’m now going to turn the microphone over to Ron Thiessen, Chairman of the Board, for an introduction and overview.

Ron Thiessen

Thank you, Lou. Turning to Slide #3 and saying good morning to everyone on the call. You will have received the material and we’ll start looking at [the Special Committee] announced that the Board of Directors has now initiated a review process to consider a range of strategic alternatives. We have a commitment to preserve and enhance shareholder value, and in light of our continuing financial challenges deriving mainly from the ramp-up productions we’ve been facing at the Burnstone Mine. And we’ll hear about those later in the call.

The strategic alternatives that we’re looking at by the Committee primarily include the possible sale of one of the company’s projects, a capital raising, a loan restructuring or even the possible merger of the company. We have retained CIBC World Markets as financial advisor to the Board and the Special Committee. This strategic review process is expected to take a number of weeks, perhaps even months if any of the fundamental changes are on the table. But we will have to make some important decisions in the very near term given our very limited cash resources.

The company’s management and Board is working closely with our lenders to potentially restructure the current term loan facilities to improve the company’s cash flow in the short to medium term. Management has also implemented an aggressive cost reduction program involving off-mine site costs and overheads. I wish I could tell you that we’ve reached an understanding with our lenders but we’re not there yet and they are following the strategic review process very closely as well. Importantly, we have reviewed the Burnstone assets with technical consultants retained by the lenders and as disclosed in these quarterly results we’ve determined no impairment charges are warranted at this time.

As part of our corporate restructuring Mr. Dippenaar has resigned as CEO and has been replaced by Mr. von Vuuren as the company’s Interim CEO. As you know, Ferdi oversaw the development of the company’s two gold mining projects during a period which witnessed the worldwide financial crisis, skyrocketing capital costs and other challenges which the company ultimately overcame. We thank him for his dedication and we wish him well in his future endeavors.

Lou has been Great Basin’s CFO since 2008 and understands every facet of the company’s operations. He will be of key assistance to the Special Committee and we welcome his assumption of duties as Interim CEO.

Despite the setbacks the Board remains confident that startup challenges at these two mines will be overcome and investors will be rewarded for their patience. I’ll now ask Lou to take you through some of the more important financial aspects of the quarter. Over to you, Lou.

Lou von Vuuren

Thank you, Ron, and moving on to Slide #4 which is a summary of the results for the quarter. Dana, our Chief Operating Officer will get into more detail of the operational performance in the later slide, but in summary ounces recovered and ounces sold at both operations were below plan, and this impacts on our cost and obviously on the earnings as well.

In comparison to Q2 2011, which was a record quarter for our Nevada operations as we not only mine exceptionally high-grade material during that quarter but we also sold some of the ounces during that quarter which was recovered in Q1 2011. We do expect a significant improvement from our Nevada operations in the next two quarters as higher-grade areas of the mine have been scheduled for mining, which should deliver results more in line with the historical results of that operation. We know what this asset can do and we will get it back to that level that it has been operating at before.

Burnstone, as Dana will elaborate on later, will be a different mine once the required permanent infrastructure is in place as it will finally allow us to really start building up the production. We came through an extremely difficult and frustrating quarter to say the least, with a disruption to development and scoping as a result of mainly water management infrastructure failures. The turn on plan for both these assets has been formulated and this will include additional technical capacity in a mine oversight role.

I will now hand you over to Dana, our Chief Operating Officer, who will take you through a summarized presentation of the operational results. There are more details available in the MD&A which we would urge you to read as well.

Dana Roets

Good morning, ladies and gentlemen. As has already been mentioned, technical challenges at the Burnstone mines have really impacted production levels. The temporary service [work handling] system has in particular failed to serve the increased mining areas during May and June. Developing and scoping activities were constrained due to the limited supply of service water although a temporary solution was implemented by early June and production and development levels in July were back to the levels achieved at the end of 2011.

[Key] targeted levels for development of stopping were not met and this will have negative follow-on impacts on production targets for the remainder of the year. The Burnstone operations produced 6392 gold ounces for the quarter, and in Q1 2012 we achieved 6671 gold ounces compared to the forecast of 17790 gold ounces. Good progress was made during the quarter with vertical shaft and other infrastructure constructions that will enable the mine to regain its momentum.

Cash costs for the quarter of $2325 were recorded, in Q1 $2182, and were impacted by the low [headgate] of materials delivered to the [mine]. Due to the low volumes these costs are not yet considered meaningful relative to post ramp-up steady state production cost estimates. We expect the production buildup to continue through 2013 and steady state production is expected to be achieved in 2014.

On Slide #6 we illustrate the temporary and permanent infrastructure, an important contributor to the production shortfall was the delay in the completion of the vertical shaft and a third stage of permanent infrastructure as indicated on the slide. The vertical shaft delay and completion of the associated shaft infrastructure impacted our service water supply, handling of excess water and the cleaning aspiration of vertical shaft bottoms which negatively impacted shaft availability.

Water is required to clean, support and grow, and a (inaudible) plastic parts near the temporary infrastructure and dirty water severely impacted production goals. An interim upgrade of the temporary infrastructure commenced in March, 2012, and the first of the required permanent infrastructure is planned for late August, 2012. The bottom right-hand quarter of the slide shows the temporary pumping cascade infrastructure up the decline indicated in red.

From the sections, water was pumped by five dammed stages to surface. Limited water was pumped by the vertical shaft. The packed [pipe] columns, versatile pumps and other engineered dams tend to overflow at the slightest imbalance or interruption of pumps. This has caused increasing flooding of our developed areas, washed away [outlies] and excessive spillage buildup in the vertical shaft bottom. The service water was being supplied by porous plastic pipes under the decline.

With these (inaudible) we experienced excessive pipe bursts and similar flooding events. The temporary infrastructure tends to void when it cannot handle the pressure of the expanded mining area. Due to insufficient safety and facilities, dirty water added to the problems causing us to replace the [levies] and valves which started the reduced pressure buildup in the pipes further resulting in pipe columns to fail.

The slide in the left top corner shows the permanent infrastructure that will be in place during Q3. Dirty water will flow from a cistern for sifting and clean water dam 1. Clean water will then be pumped to the [formulated] dam on [164]. [Service] water will be pumped to surface. Service water will be able to feed into sections via high-pressure [220 meter] columns. Shaft time was severely impacted with the lining of spillage on a daily basis near shaft bottom. Spillage as indicated in blue was started in February to allow access to the shaft bottom, and (inaudible) of spillage was [LSV]. First [firing] took place on the 10th of August.

On to Slide #7: production slowed during Q1 to deal specifically with the flooding issues mentioned during the previous quarter, causing [replacements] and most of this work was completed by April . This would include extra pumping columns in a deep (inaudible) and backup pumps at all the dams. During May it was realized that although increased load of pumping capacity and reliability, still this temporary water supply started to fail.

A further improvement to the temporary water supply system was required and in May, 2012, we commenced running dedicated water from surface into the various mining regions thereby separating the supply of water for the various mining regions which reduced the requirement to deliver high volumes through one column. These are also indicated in blue on Slide #7. This was completed by mid-June.

These upgrades have led to an increased service water supply as of the end of June, 2012. Over 2.5 km of piping was installed to replace the old system. The temporary system will be replaced by the permanent system which is nearing completion.

Moving to Slide #8, studying Slide #8 and comparing the green achieved during the four quarters of 2011 with the first three quarters of 2012, the impact of infrastructure charges in all-year 2012 are evident. As (inaudible) the continuation of the increase in the market development is evident from the trend of 2011 where we are first achieving spend reduction for the quarter.

The benefit from improvement in the temporary infrastructure has already had a positive impact on the development rates for July, 2012, as is evident from the graph. Production interruptions were repeated with delays in May and June, 2012. The completion of the permanent infrastructure is expected to significantly reduce the risk of future production interruptions.

During Q1 and Q2 2012 we dealt with senior management changes, solved the block displacements and mastered our mining method. We’ve focused our staff availability with an emphasis toward achieving our development goals. We decided to tackle and resolve infrastructure challenges in the vertical shaft through delivery and installation of permanent service water pumps in Q3. Development of the space [rim] down to shaft bottom was completed, resulting in shaft equipment and infrastructure that was under-designed and installed by contractor (inaudible) to rephrase in Q3.

With regards to the (inaudible) infrastructure the focus has been on the completion of the third permanently [awarded ceiling] bond and dam by 8 August, 2012. Completion of the permanent work shaft and refueling basin will be fully operating by the end of 2012 and the installation of a conveyor between the C upper block of the vertical shaft which is planned for completion by the end of Q3 2012.

Moving on to Slide #9, the combination of the factors discussed may have resulted in investor concerns and along with stopping of the mining method has been the cause of the underperformance at Burnstone. However, this is not management’s view. The photos on Slide #9 are from recent results using oil stopping and illustrated oil stopping have resulted in good stopping method and fragmentation control.

Moving on to Slide #10, during Q2 2012, 2620 channel samples were taken from 2536 meters of development. Channel samplings that tested (inaudible) in 2012 indicate two (inaudible) samples and an average raw channel worth of 73 cm grading 7.55 gram per ton of gold for a gold content of 547 cm gram per ton. These results are in line with mine development expectations. The current life of mine plan indicates an average share net worth of [16 to 18 meters].

On Slide #11 we illustrate the progress of trial mining at Hollister. The Nevada operations extracted 14,857 gold equivalent ounces from trial mining activities during the quarter. Q1 2012 achieved 20,459. As we will see indicated, the high grade nature of the Hollister ore can lead to quarterly guide fluctuations which are evident when comparing the grade of 1.35 gold equivalent ounces in Q2, 2011, to the grade of (inaudible) 63 gold equivalent ounces per ton achieved in Q2 2012.

Mine planning indicates an increasing grade for the remainder of the year as a result of a high-grade shaft being available for mining. The decision taken in the beginning of 2012 to focus on additional ore development will [greatly] improve mining flexibility by increasing the availability of additional stopes to allow for improved grade building and is expected to have a positive impact on the mining grade for the remainder of the year.

The company’s (inaudible) improved during Q2, 2012, due to more effective [copper stripping following the completion of the installation of the remaining components of the acid wash and copper regions license circuit during the quarter]. Further improvements to recoveries are expected in Q3 2012, and a newly commissioned stripping circuit is optimized. Defined by shipments of [in Congo] to the metal refinery in South Africa were completed during the quarter with the final system effectively (inaudible) to be finalized during Q3, 2012.

Metaling prices and (inaudible) decreased by 2239 gold equivalent ounces to 12,208 gold equivalent ounces. At the end of the quarter, as a result of the discontinue of the carbon as well as the carbon inventory adjustment on final assays received. Inventory balances are expected to decrease further during Q3 2012.

Now that ore is being pulled at (inaudible) and as a result of the settlement of the final (inaudible) on the carbon campaign. The carbon ounces are expected to return to the quarterly average of 20,000 to 24,000 gold equivalent ounces as a result of the improvement in mining grade as well as (inaudible) improvements and recoveries. I will now hand back to Lou who will continue with other aspects of the quarter.

Lou von Vuuren

Thank you, Dana. On Slide #12 we showed the progress of the EIS at our Nevada operations. The draft EIS was published in the Federal Register on June 1 earlier this year which commenced the 45-day public comment process which then ended on July 15. Twenty-eight comment letters and/or emails were received during this period and management is of the opinion that the comments received have already been substantially addressed in the draft EIS but this decision lies with the Bureau of Land Management or the BLM.

The company will meet with the BLM and a third-party contractor to review the comments and decide on the approach to responding to those comments. Should the BLM agree with management that no additional notices will be necessary, the targeted time for the record of decision will remain late November, 2012 . We are trying to set up this meeting with the BLM to get a better understanding of the timeline going forward.

On Slide #13 we start a summary of the financial results. The graph shows the revenue and also the gold equivalent ounces that were sold at both operations as well as the comparison to the quarterly averages for 2010 and 2011. I think it’s fair to say that the revenue from the ounces sold in 2012 are not keeping with what we saw in 2011, further evidence that the operations need some more attention and that they are definitely capable of better performance than what we’ve seen in the previous two quarters.

On Slide #14 I’ve already addressed and discussed the impact of the operational performance on the earnings. I think it’s a trend we need to turn around by improving production and in also managing and improving our costs. We do believe that this is very achievable and that with the turnaround plan of both operations, we expect this turnaround to be evidenced within the next two quarters. The cost (inaudible) of ore operations are still impacted by the grade but also by the last of the in-carbon gold transport costs we incurred up to about the middle of May.

The one factor that’s affecting the cost of Burnstone is obviously the head grade of the ore being delivered to the mill. As a result of the infrastructure changes we could not extract the [played] ounces from stopeing which has really impacted on the head grade. The cost reduction plan is expected to improve the unit costs as well as improve production levels. The current costs are definitely not predictive of what is achievable once the steady state production is achieved.

One item on our income statement, the impairments of our loan to related (inaudible): we took an impairment charge for a further portion of the loan to Black Economic Empowerment (inaudible) [Tranta] due to the sheer price of the company not providing enough collateral to actually secure the loans from [Investig] as well as the money it loaned from Great Basin Gold. This is consistent with what we’ve been doing in the last two quarters.

We have halted the restructuring negotiations for the [Tranta] loan as previously announced as a result of strategic review processes which are currently underway. We are continuing to work with [Tranta] and their lender to also resolve this outstanding matter in the near term. The marked-to-market adjustments on our zero cost collar hedge structure had, for a change, a positive impact on earnings and this is due to the result of changes to the valuation input parameters into the structure.

On Slide #15, speaking of the hedge position this slide summarizes the hedge structure that we entered into in support of the financing transactions in 2010 and 2011 with the current gold price. We do not treat any other gold prices and the ounces in the structure expire and as long as the price of goal remains below the strike price of the structures there will also be no cash impact on the company. Just over 13,000 ounces actually expired on these structures during the first six months of 2012.

Slide #16, moving on to the balance sheet: I think the net working capital position is a direct result of the operational challenges that we’ve experienced over the last couple of months. The strategic process that we have launched is aimed at improving the balance sheet and also to secure the required short-term liquidity for the group. We signed a $25 million prepayment facility with Redcoat at the end of June, 2012, which is a similar prepayment facility that we negotiated in October, 2011, that one being paid off by March, 2012. This amount has been included in our trade other creditors and those will be payable over the nine months that commenced in July, 2012.

As we move on to the next slide where we presented a more detailed breakout of our borrowings on Slide #17. The slide demonstrates that as in the past the accounting value as well as the settlement value or cash flow value of the loans that we have. The accounting methods on a convertible debenture sometimes make it slightly confusing to understand the total debt position. The increase on the convertible debenture from December is just due to the increase in charge reported as interest for the income statement.

Term Facility 2, this is being repaid in quarterly installments and therefore the decrease from December, 2011. The remaining $20 million was drawn down on Term Loan 1 during the six months ended June 30, which now leaves us with the total of $150 million outstanding, only interest currently being payable on this facility.

As part of the strategic review process we have involved our bank lenders to review potential options available to restructure the term loans to alleviate the pressure on cash flow in the short term. Although no agreement has been reached as yet we are quite optimistic that a positive outcome will be arrived; but until a plan has been decided and agreed with the stakeholders I really can’t say a lot more about that.

On Slide #18, the cash flow statement: I think the cash flow from operations obviously was adversely influenced by the operational underperformance. [With deferred] production to increase we expect the cash flow from operations to improve over the next couple of quarters.

Just in summary in terms of the operational and financial performance over the quarter, as I mentioned there is more information available in the MD&A. So before we go into the questions and answers let me just quickly provide you a little bit of a summary of the presentation on Slide #20. As Ron mentioned, we still believe in the value of the assets but we do need to get the performance to a level where the values confirmed by the gold we recover at these operations.

We have made a lot of changes already and expect more to come in the short term as we will be focusing our efforts on demonstrating the value potential to our shareholders. The infrastructure challenges at Burnstone did not allow us to build up momentum in Q2 and we now have to deal with the follow-on impact on this. We have cut back expectations to a more realistic and we believe achievable production forecast which is reflected in the current state of infrastructure and the mining rates being achieved.

Our lenders request the [Snowden Group] to be informed of [plans] to reinvest our project and although this is not yet finalized the feedback we’ve had up till now supports the positive expectations from management and the Board. The Hollister operations need to get back to operational levels that we have previously demonstrated and that we know those assets are capable of. We expect quantitative developments from Hollister and Esmeralda over the next couple of quarters.

The impact of the changes already made and those to come will only be evident over the next two quarters, so I do not expect a significant improvement in overall results in Q3 as a result of the time that it normally takes to embed the kinds of changes that we are making. As Ron has mentioned and shared with you, the Board has embarked on a strategic review process to ensure we enhance shareholder value.

I do believe that market valuation and expectations on returns have changed in the current economic condition we operate under. We know that we owe it to our shareholders to review the best potential options out there to deliver this value to them in the short and medium term. We will be working on improving the balance sheet of the group as part of this strategic review and we’ll involve all stakeholders in ensuring that the assets that have been bought over the past few years can now deliver the return that we know that they are capable of.

With that I think we’ve got another challenging but exciting quarter ahead with a lot to do. Jeff, I’ll hand it back over to you for the question-and-answer session.

Question-and-Answer Session


Thank you very much. (Operator instructions.) Our first question comes from the line of Josh Wolfson with Stifel. Please proceed.

Josh Wolfson – Stifel Nicolaus

Hi, good morning. I unfortunately have a lot of questions here so I’m not sure if I can stick to that one-question limit, but I guess first off just if we can address the current debt situation. Can you say exactly what the covenants are for both terms of debt and also what your preferences are for debt renegotiation?

Lou von Vuuren

Josh, hi, it’s Lou. Yeah, I wouldn’t expect anything less from you than a couple of questions so let’s deal with them. Josh, the current covenants are obviously the reason why we’ve involved our lenders extensively over the last couple of weeks in this process as well. We do believe that it’s in the best interests of all involved, all the stakeholders including the lenders to ensure that we do not trigger any of those covenants and cause a default in the interim process while we’re all looking at the strategic alternatives.

The covenants as we’ve discussed in the past are relatively light in terms of what we need to achieve. I think the covenant that we’re all focused on at this point in time is the minimum liquidity covenant of running a three-month average balance of approximately $10 million within the group, which in itself again is not a quite significant covenant. But due to the liquidity position we do find ourselves in this is the one we are monitoring with our lenders at this point in time.

As I mentioned before, it’s tough to [commit to] anything at this point and I also don’t want to speculate on it. All that I can say is that our lenders have really been very positive in working with us to finding solutions over the short and medium term to ensure that we do not trigger any of these covenants. And they’ve been working with us on alternatives. So it is a scenario of we’ve got to go through the strategic process and see what options the company has available to improve the short-term liquidity. Depending on how successful we are with those alternatives, and as you would have seen in the press release and in the MD&A are we looking at asset divesture, are we looking at potential capital raises? Are we looking at a disposal of the company itself as well?

Depending on the [extremes] of those transactions and the lenders, in my mind, no doubt will support us as far as they can in terms of their own risk exposure; and I am slightly optimistic that we’ll get a positive outcome from it. Let me also say that I think to increase the debt levels is in itself already quite challenging due to the gearing of the company and also the performance we’ve seen from these assets over the last two quarters.

But with that being said we are in open discussion with them and making sure that if we get past this short-term liquidity crunch and we also get to a point where we know what the outcome of the strategic process is that they should be willing to restructure the loans in a format that works for the company and definitely for them as well.

Josh Wolfson – Stifel Nicolaus

Okay. And then I guess if I can limit myself to one question, in terms of the inventories that are currently outstanding and the 12,000 [ances] that are on hand at the refinery, how much of that production accounts for the current inventory total on the balance sheet of $31 million?

Lou von Vuuren

Josh, the answer is that our inventory is currently in process, so it’s a couple of stages. It includes inventory at the plant not yet shipped; it includes a couple of thousand ounces that are still remaining in carbon and also some [Doray] that would have been delivered. I think if you look at what happened to this balance over the last two, three quarters you will see it’s come down slightly but it’s relatively stayed flat.

So your ounces sold at the Nevada operations is very close to your ounces produced as well. If you see in the MD&A and also in the presentation the line under the Nevada operations of ounces recovered and you compare that to ounces sold you will see it is very much in line with each other. We are expecting to get this number down in Q3. We really only started pouring [Doray] towards the early part of June and we did have one or two challenges in the first weeks of June to get that acid wash and stripping circuit up to performance. We’ve seen much better improvement in July in terms of getting our strip ratios sorted out and the ounces are definitely increasing from a sold and delivered perspective and thereby bringing down the inventory quantum as low as we had it at the end of July.

Josh Wolfson – Stifel Nicolaus

Okay, and then just quickly: for the resource update at Hollister, should we still expect that to come out this quarter?

Lou von Vuuren

Josh, yes. In addition to that we are also working on a reserve update. Because of the delays we’ve experienced from a predominant QA and QC process over the last two quarters to get up the resource. We had just decided to update the resource to June 30 of 2012 to keep it as relevant as possible and to update it as possible; and also we think there is a reserve statement to that. We’ve got independent technical consultants working on that with management and we do expect to have that ready definitely before the end of the quarter.

Josh Wolfson – Stifel Nicolaus

Okay, thank you very much. That’s all my questions.


Our next question comes from the line of Craig Gilbert with Linden Advisors. Please proceed.

Craig Gilbert – Linden Advisors

Hi, thanks for taking the question. I just had a couple. One is on Hollister: beyond the second half of 2012 into 2013 and 2014, can you give us a sense of where you think steady state production is going to shake out? Will it be in that 20,000 ounce to 24,000 ounce range? And also can you give us a sense of cash costs and I guess what the ongoing capital requirements are from a predevelopment and CAPEX standpoint?

Lou von Vuuren

Hi Craig. Let me try to summarize this as best I can. Consistent with our previous disclosures, Hollister has got obviously a comfortable run rate of anything between 85,000 ounces per annum and 100,000 ounces per annum. Due to the high-grade nature of that ore body, depending on mind scheduling and where you focus your attention you might see some quarters going up 25,000 to 27,000; and then you have a quarter like we just came out of which the average grade was .65 gold equivalent ounces per ton.

The idea is that you have stope availability there that you can blend to a grade to slightly improve it, yet you then get into this average of about 22,000 ounces per quarter to 26,000 ounces per quarter. From a cash cost perspective, once again I think I’ve mentioned it in previous quarters but Hollister is a relatively small operation, high-grade as much as well. So the moment that you have grade fluctuations you do see the impact in your cash costs per ounce quite severely.

So if you get into the 22,000 ounces per quarter to 26,000 ounces per quarter, your average grade should be on the order of .87, let’s call it .8 to .9 gold equivalent ounces which is close to the current reserve grade. If you mined that grade and mined that volume your cash costs should be on the order of about $650 an ounce all-in.

A couple of things to remember about cash costs going forward to steady state: a significant component of cash cost achieved in 2011 and 2012 is one, the transport of carbon to the refiners and most of that was done to South Africa; it’s extremely expense to do that. The second one is that once the EIS has been completed we get a permanent power line in and that reduces your power costs quite a bit as well.

From a capital perspective, the only capital we do spend at Hollister in the near term is maintenance capital on our plant – we need to ensure that our plant is in tip-top condition and running. Secondly we will spend capital on the permanent power line that we will commence installing later this year once the EIS is completed; already a lot of work has been done on it but we are limited to what we can do before the EIS is in hand. And then the third component is really underground development in terms of opening up stopes and creating that flexibility to ensure you are able to mine at sustainable levels.

Total capital for Hollister on a steady state basis, I would say will run between $12 million per annum and $16 million per annum, and that includes the predevelopment there as well.

Craig Gilbert – Linden Advisors

Okay, thanks very much. And then I had a question on the Term Loan 1. It says on the document that it’s secured by the Burnstone property, its assets and certain subsidiary guarantees. Is that non-recourse to the parent? Is it essentially just secured by Burnstone.

Lou von Vuuren

That’s correct; it is secured by Burnstone and underlying assets. In terms of the securities that are in there, there is always an impact on your holding company as well because the line actually sits at holding capital level, securitizes your assets but take into account that the holding company doesn’t have a lot of assets except for its investments in both operations as well. The term loans, although they sit in different legal entities they are secured over different legal assets – it all goes back to [cross defaults] and also guarantees up and down from the group level. So you can really look at this from a group perspective if you want to cut through a bit of the haze.

Craig Gilbert – Linden Advisors

So would the Term Loan 1 have access to any value from Hollister?

Lou von Vuuren

Not directly, but if it is (inaudible) where Hollister is disposed of, obviously there is change of controls in clauses in those loans as well as is standard with any of these kinds of term facilities. So if Hollister is disclosed the proceeds of that and the usage of those proceeds is slightly restricted in terms of what you want to do. If you want to use it to get Burnstone up and running that’s not a major issue. If you want to use it for new acquisitions or things like that it will be restricted due to the restrictions placed on the holding company.

Craig Gilbert – Linden Advisors

Okay. And the last question is just on the carrying values. Can you tell me what the carrying values of Hollister and Burnstone?

Lou von Vuuren

No, this is where the accounting mumbo jumbo comes in as well, Craig, so you’ve got to understand that. The accounting values are influenced by things like capitalized operating costs when we bought the projects as well as capitalized interest during the development phase. But sitting on our balance sheet Burnstone has got a cost on the order of $630 million.

Now Hollister, if you remember the way that we account for the capital, all predevelopment actually gets expensed as it is incurred, so that’s why Hollister’s capitalized cost is actually significantly lower than what we believe the market value of that asset is. We’re looking at about $130 million on the balance sheet for Hollister although we believe the market value is north of $250 million to $300 million.

Craig Gilbert – Linden Advisors

Okay, thanks very much. I appreciate all the answers.


(Operator instructions.) Our next question comes from the line of Tony Sonn, private investor. Please proceed.

Tony Sonn – Private Investor

Yes, hello, this is Tony Sonn. So I understand that we are going through a strategic review process in order to preserve and enhance shareholder value. As long-time shareholders are aware stock price or market cap is currently significantly below shareholder equity as considered on the balance sheet. Have you considered the sale of Burnstone itself as Burnstone is valued at far higher than the current market cap of the entire company? You could use the sale of Burnstone in order to concentrate on Hollister and take the proceeds of that sale to pay off debt and also to finance the expansion of Hollister, and also possibly even issuing a special dividend to current shareholders thus releasing and enhancing shareholder value.

Lou von Vuuren

Tony, I’m going to comment on that, and Ron, please if you want to add to that you’re more than welcome. I think that’s exactly the purpose of the strategic review that was initiated earlier this quarter. I think it is also important to understands that this process didn’t start yesterday. It is a process that we’ve been going through for the last couple of weeks and even months, and during this process we will be looking at all options – selling either or both of the assets.

And we are basically looking also then at selling the entire company, and the options that we get from that I think is all going to be about what is the appetite for these assets as well as for the company in totality and then get to where we can get the most out of it for all stakeholders. And by stakeholders we mean obviously our shareholders and our long-term shareholders who have been with this company through a tough time, but it also includes our lenders, our suppliers, our employees – to include all of them.

Burnstone, yeah, you mentioned it – the value of Burnstone is more than the market cap of the company. I think the value of Hollister is more than the market cap of the company as well. I think we can go into a long debate of what is the real worth in terms of what an asset has proven to be worth from a production point of view and that’s where we’ve got to close the gap. We [cite] it on a net asset value perspective and this is from a discarded cash flow spreadsheet, you know? We see the value as X but the market is not valuing it at that point as well.

So that’s why we need to look at a strategic process to say “But isn’t there a shorter term possibility and a better possibility to enhance the shareholder value that we can close this gap?” because we all know that it is. And I think the message we’re sending out with our disclosure today as well as that we know it’s not business as usual. The company has been making significant changes and will make a few more. We’re really looking at everything that we have looked at previously and have looked at before and comparing to what is the best option available to the company. Ron, I’m sure you want to add something.

Ron Thiessen

I think you’ve covered all the bases. I mean there isn’t anything that we would say is off the table in terms of divestitures of projects. Obviously there’s two principle projects the company’s got and we are considering either one. I’ll just point out that valuation, our focus is on impairment and the like. You look at net asset value in its unique steady state production and what that would look like at the various metal prices and discount rates. And certainly all of those demonstrate that these assets are well in excess of their booked value yet the marketplace doesn’t give us that valuation, and so then the question comes down to on a negotiation what kind of valuation can you get as well?

Tony Sonn – Private Investor

Okay, thank you. So I believe earlier you actually mentioned that Burnstone had a booked value of about $650 million and you were mentioning Hollister had about $150 million on the books. And so that would translate to something like $0.88 per share of actual equity value when you subtract all liabilities, all debts. So therefore the company is incredibly undervalued right now in terms of market cap so I’m glad to hear that you are actually looking at a timely way to enhance shareholder value in this way. Perhaps you can also consider doing a special dividend as a result of the sales because that would actually cause the stock price to increase dramatically as the current stock price right now I believe is somewhere in the range of $0.26 per share. I’m just stating a fact.

Lou von Vuuren

Tony, thanks for your comments and I think we’ve really made an effort to ensure that a Special Committee of the Board has been appointed who possess the skills and the know-how to look at all of this, these options and no doubt with our advisors involved we will get through to the best possible outcome for our shareholders. And they’ll evaluate all the options that they can to actually get to some sort of closing that valuation gap.

Tony Sonn – Private Investor

Okay, thanks much.


Our next question comes from the line of Jonathon Guy with Royal Bank of Canada. Please proceed.

Jonathan Guy – RBC Capital Markets

Yeah, good morning, guys – a question on guidance and updates. I’m just looking back at what Ferdi said in the transcripts of the Q1 report in May and he still had a high degree of confidence in hitting the full-year numbers as set out in (inaudible) of that transcript. I mean given what’s happened in the last quarter are you now going to provide monthly updates on production or what will be the status of that moving forward? Or is it still going to be quarterly?

Lou von Vuuren

Jonathon, I think the one thing that we need to do in the process that we’re [working] is keep all stakeholders involved with where we are. It is expected of the strategic process and the potential outcome of that that we need improved performance from both operations – so that’s the one item that we are 100% sure of and it’s not even in discussion. If it means that we need to have more regular feedbacks to the market on that

I think one should also again, as we were in the past be cognizant of the fact that within that time period in the mine it’s not a long time and things move up and down a little bit. We will definitely endeavor to put out more regular updates on the process as well as the process in getting our production back to the level that we know we can.

I think just in terms of to put it in perspective of what happened in the quarter as well, when things started going wrong at Burnstone from the water perspective, the impact was quick and it was quite severe. But the immediate plans that were put in place to resolve that showed that it won’t be such a severe impact. As we went one week, two weeks, three weeks into the process it just showed that the temporary plans that everybody thought would have a high degree of success were actually not working as effectively as we wanted and we had to go to Plans B and C.

And all of that takes time, so it’s a matter of understanding what is the real issue, how long it’s going to take to resolve that issue and what is the real impact on production going to be? It does take a bit of scratching your head to get to those numbers unfortunately.

Jonathan Guy – RBC Capital Markets

Okay, thanks.


Ladies and gentlemen, since there are no further questions in queue I’d now like to turn the call over to Mr. von Vuuren for closing remarks.

Lou von Vuuren

Jeff, thank you very much and thanks to everybody who attended the call and participated. I need to thank all stakeholders involved in this process. No doubt we will be engaging with all of you over the next couple of days and weeks and if there’s any questions, concerns, matters that you would like us to deal with as well you’re more than welcome to contact myself. I and Ron are available to deal with these matters over the next couple of days. We’ll gladly set up a separate call to talk you through our plans.

It is an unfortunate situation we find ourselves in but we need to do what we have to to get through this, and to protect and enhance shareholder value as well. The best outcome for all stakeholders involved is that these assets are given an opportunity to show their real worth. That might not be in the current structure or legal entity or vehicle but that’s why we’ve got very competent Board members on our Special Committee to guide us through that as well as we’ve got financial advisors.

So once again thanks for listening to us and if there’s any more questions you’re more than welcome to contact me on email, and we’ll try to (inaudible) in the next couple of days as well. Thank you very much.


Ladies and gentlemen, that concludes today’s conference. Thank you for your participation; you may now disconnect.

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