Northgate Minerals Corp. Q2 2008 Earnings Call Transcript

| About: AuRico Gold (AUQ)

Title: Northgate Minerals Corp. (NXG) Q2 2008 Earnings Call August 1, 2008 11:00 AM ET

Executives

Ken Stowe - President and CFO

Jon Douglas - CFO

Analysts

Steve Butler - Canaccord Adams

Anita Soni - Credit Suisse

John Doody - Gold Stock

David Christie - Scotia Capital

Bryan Glass - CIBC World Markets

Howard Flinker - Flinker & Company

Bruce Mahon - Mahon Investments

Larry Passim - Raymond James

John Bair - SKA Financial Services Inc

Operator

Welcome to the Northgate Minerals Corporation's second-quarter results conference call. At this time, all participants are in listen-only mode. Following the presentation, we will conduct a question-and-answer session. (Operator Instructions)

I would like to remind everyone that this conference call is being recorded on Friday, August 1, 2008, at 11 am Eastern Time. I will now turn the conference over to Mr. Ken Stowe, President and Chief Executive Officer. Please go ahead.

Ken Stowe

Thanks operator, and good morning everyone. As Northgate's CEO, it's my pleasure to welcome you to our second quarter 2008 conference call and webcast.

Before we get started, I want to call your attention to several points. First of all, this morning's Q2 news release can be found in the Investor Relations section of our website at www.northgateminerals.com.

Secondly, for those of you who are using the traditional conference call lines, slides for today's presentation are also available on our website in the same section under the Presentations tab.

Lastly, for those using the conference call lines, who would like to try the webcast instead, you can gain access to it by clicking on the Conference Call and Webcast header on Northgate's home page and follow the instructions.

Our CFO, Jon Douglas, will begin today's formal presentation with a review of the Corporation's second quarter results, and then I will review the major operating achievements at our mines, as well as our exploration results release during the quarter at both Young-Davidson and at Stawell mine in Australia. As always, at the end of the formal presentation, we will welcome any questions you may have.

Before we begin, please note that in responding to questions and talking about our financial and operating performance and our exploration and development projects, we may make forward-looking statements. These statements are subject to known and unknown risks and future results may differ materially. For further information on known risk factors, I encourage you to review our 2007 AIF or annual report.

Now I will pass it over to Jon.

Jon Douglas

Thank you, Ken. Good morning, everyone. I would like to begin today's presentation by summarizing our second-quarter production results contained in this morning's news release. For those of you who have access to the presentation on our website, please turn to page 4.

Our Kemess South we mined of total $6.4 million tons of Ore and waste at the Kemess South open pit and at average rate of 50,000 tons per day of hypogene ore. Recoveries were consistent with the type and grade of the Ore mills and the mine produced 46,124 ounces a gold and 13.94 million pounds of copper during the quarter, which was about 6,000 ounces of gold higher than we had projected at our AGM in May.

Net cash cost to production Kemess during the quarter was $92 per ounce compared to net cash cost over $105 per ounce in the first quarter of this year. At the Stawell mine ore mine was about 18% below plan during the second quarter, due to temporary mining constraints imposed during the installation of ventilation systems upgrades. As a result gold production was lower than planned at 22,807 ounces and cash costs were higher than expected, at $627 per ounce.

At our Fosterville gold mine, gold recoveries improved dramatically from 54% in the first quarter to 76% in the second quarter. But mine production did not rise as quickly as we projected during the transition to owner mining. So total gold production was only 14,630 ounces rather than the 17,000 ounce total we had originally projected. As a result of the lower production and certain one-time cost related to the owner mining transition, the cash cost of production at Fosterville was $1,150 per ounce in the quarter, rather than the $878 per ounce we had originally projected. Overall Northgate posted or produced rather 83,561 ounces of gold during the quarter at a net cash cost of US$423 per ounce.

Turning to the next page, our consolidated metal sales during the second quarter were 84,337 ounces of gold and 16.2 million pounds of copper at realized prices of $883 per ounce and $4.10 per pound.

I would like to briefly summarize our second quarter consolidated financial results. Total revenue in the second quarter was $139 million compared with $81 million reported one year ago. The large increase in revenue was due to the increased gold production associated with our newly acquired Australian mines and dramatically higher realized prices for both gold and copper.

Our consolidated cost of sales increase to $102.6 million from about $60.4 million, again reflecting the consolidation of Australian mines, but also as a result of higher operating cost at Kemess due to increases in prices for diesel fuel, [grinding steel] and rail transportation and of course the effect of the strengthening Canadian dollar year-on-year.

Exploration costs for the second quarter were higher than they were one year ago due to increased activity at the Young-Davidson project and the substantial exploration programs that we are undertaking at Stawell and Fosterville.

Consolidated net earnings for the quarter were $1 million in the second quarter compared to $8.6 million in the second quarter of 2007. Difference between these two numbers was a result of substantially higher cash taxes payable by Kemess in 2008.

The tax rate looks somewhat unusual in our consolidated financial statements because our Canadian operations made substantial before-tax net income of about $17 million, which is rather highly cash taxable, while our Australian operations reported a net loss before tax of $10 million during the quarter.

Turning quickly to the cash flow statement on page 7 of the presentation; you can see that our cash flow from operations was $41 million during the second quarter, and while we spent a substantial amount of capital upgrading our newly acquired Australian operations, we still managed to add over $24 million to our cash balance, bringing our total cash on hand to $77 million at the end of the quarter.

Before, I turn the presentation over to Ken, I just wanted to address two areas of our financial situation, which had been the subject of a variety of questions from shareholders. The first of these relates to the universal shelf prospectus that we filed in June. Many investors at that time were concerned that the filing of this shelf indicated that we were planning an immediate equity issue, and would dilute shareholders. I just want to assure everybody that this was not the cast at the time and is not the case now. We put this shelf in place, but would be in a position to raise capital for the development of the Young-Davidson mine when that time comes.

Filing of the shelf was necessary due to the large amount of trading that occurs in Northgate shares in the United States, which makes us ineligible for certain exemptions that are usually available to Canadian companies who wish to sell shares in the United States.

The second area, which quite rightly generates significant questions is our auction rate security investments. Our ARS portfolio had a fair market value at the end of June of $52 million, compared to its original par value of $72.6 million. These investments are still a liquid, but the bonds continue to make regular cash interest payments, still carry investment grade ratings.

At June 30, we still considered the impairment on our ARS portfolio to be temporary, and as a result the loss associated with it has been run through other comprehensive income.

Also at June 30th, $44 million of the loan we have from Lehman Brothers who purchase these ARS investments for Northgate was still outstanding. On July 3,, 2008 we filed the statement of claim with FINRA in New York. This claim lists Lehman Brothers and certain Lehman employees as respondents to the claim.

The statement of claim requested that the FINRA arbitration panel award relief to Northgate. The Lehman's wrong for purchase of these auction rate securities to currently illiquid. Statement of claim also ask the FINRA panel to relief Northgate or any obligation to repay the loan that's currently outstanding from Lehman as part of the compensation for damages caused by Lehman's actions.

And now I would like to turn the presentation over to Ken.

Ken Stowe

 

Thanks John and we would like to move on to slide 13 which is obviously a high level operating highlights from the various operations and projects we now have. Kemess had another strong quarter in terms of cash flow. For the year-to-date it's generated….in the quarter generate $65 million actually and for the year-to-date it's considerably more than that close to a $100 million a year, which we are now using to make investment at Young-Davidson and in Australia.

The Young-Davidson project continue to move on in a very positive way we -- it's much closure to it's our objective, that's 3 million ounces in the ground when we started the project out.

In Stawell we achieved some excellent high grade drill results in the gold and gift area and we look forward to add operations into this for a lot longer than we had contemplated when we acquired it and at Fosterville we successfully completed the conversion to owner mining, which is a key corner stone of moving that operation into what it think it can be as early as next year.

Moving to slide 14, Kemess had, as I said, a very strong quarter. There were some operating challenges, which our management team managed to work them out and generated a better production than we had originally planned.

We actually lost power for an extended period again and in April we had similar incidence in the first quarter. In the second quarter we had another one we actually lost full power to mill for almost a week. We had partial power four of those days fortunately, but obviously the mill had done an excellent job. We actually set a record availability of 97% in June.

Also the challenge we've been dealing with in the pit through some parts of the west wall where the remaining high grade reserves are have been moving a little bit and we've been working in a proactive way to deal those. And so we had to change the scheduling of a ore, we expect have remedied all those issues in the third quarter, which is why we will be able to get access to the higher grade ore in the fourth quarter and have a very, very quarter on the fourth quarter.

I think the team at Kemess has done a good job of doing that and as I said at our AGM, our guiding principle was to make sure we can get all the reserves out of the Kemess South pit. We were proactively for that.

We move on to slide 15 which is the Stawell Operation. Production was somewhat less than our original projection but we have a number of initiatives going there. On this we were setting Stawell up for the long-term also. This is an operation that people should realize for the last decade has probably been in closure mode and we've now taken the approach that we want this operation to work for a long period of time.

We've been putting a number of upgrades in underground in both the ventilation and cooling system to improve the underground environment. We have purchased three new 60-ton trucks, which will maximize productivity. They will be arriving in the third quarter of the year.

In addition to that, we've started a $7 million exploration program, which has already had some very positive drill results, and we're moving into other areas. But we've been rehabbing old parts of the mine, so we can get exploration platforms. And that's had some impact on the short-term productivity for getting ore out of the mine. But we think that's essential for the long-term future. And we would expect in the third quarter to give an update on the reserve situation at Stawell, and you should expect that the mine life is going to be extended.

Moving on to Fosterville, there has been a lot of activity going on. This is our turnaround mine. We're actually, I would say, commissioning the underground mine at Fosterville. The former owner actually didn't have the financial resources to do this. So, we're doing that. We've made a substantial investment in the mobile equipment so that we can become the miners there, and we also now have 110 miners that moved over from the contractors that are working for us.

That transition has went very, very well, and you will see production starting to ramp up now accordingly in the second half of the year.

We've also made major steps on the metallurgical issue to further improve the recovery, as we see now opportunities to substantially improve the recovery up towards the 90% level perhaps. We have a power plant that's been working onsite since May where we're evaluating basically online the improvements that we think we can make. We're being very successful and are presently engineering the fixes that we'll make and hopefully have online in Q1 2009 and will dramatically improve the recoveries both on normal lower [prig-robbing ores], but also on the higher [prig-robbing] ores that we do encounter from time to time.

Next slide is a Young-Davidson. And we have already announced a couple of weeks ago some very impressive drill results from a drill program this year, which will have a very positive impact on the resource when we recalculated for the feasibility study. It's obvious now to us and by looks at the cross section of Young-Davidson property that the mineralization is now lining up as one continuous sheet of mineralization, which will have a very positive impact for the mining of that deposit.

We also released the results of the preliminary assessment report. What we knew at the end of December 2007, we consider was the minimum to have a project to move forward. That preliminary assessment had a positive result even at $635 gold, and we obviously now expect to go a little bit ahead of price. We expect with the drilling results from 2007 and also some geotechnical work that we're just commencing right now that we'll be able to optimize the underground part of the operation and optimize and improve that preliminary economic assessment.

Now, moving on to slide 17 and 18, these are projections for production from the various operations for the remaining here and the cash costs. Just to highlight, as we have indicated since AGM, Kemess production will be lower in the third quarter of the year, but will have a booming fourth quarter with total production been around 210,000 ounces. Cash costs on the next slide at Kemess will be for the year to average $28 an ounce.

Stawell will continue to produce about the average rate of about 25,000 ounces a quarter and produce over 100,000 ounces this year.

I think the key thing for people to recognize is, at Fosterville, the operation is going to ramp up to what's it's truly going to be in the long term, which is producing at least 25,000 ounces a quarter for the long term. And you saw this was the impact of that in the fourth quarter and then moving into 2009 or forward.

In Q4, we expect to produce well over 125,000 ounces from the operations. We also have extremely strong copper production from the Kemess operation, which will obviously contribute to the bottom-line.

On slide 18, you have the breakdown of the operation or cash costs for the various volumes. And once again, you'll notice that when we get to Q4, you'll see that the Stawell and Fosterville operations, the cash cost will be essentially the same. And as I said at the AGM and various people I have talked to, fundamentally these two operations should have a very similar cash costs for both underground operations within 100 miles of each other.

Fosterville is a shallower mine. And Stawell, that also has a BIOX plant, which increases the cost slightly. So, fundamentally there should be similar cash costs, and we are indicating that we think that there will be by the end of this year.

Slide 19 gives a typical long section through the Young-Davidson project. And you see once again that the section is filling in nicely toward the gold mineralization. Here is the various zones are connecting up that are basically separated by a bunch of dykes, which are shown in brown. Current preliminary assessment had a gold resource of 2.11 million ounces, and our target internally and we think we are on the way to achieving is 300 million ounces by the time you do the feasibility study.

Some of the highlights from the 2008 drilling are shown there. We purposely drilled down the dip or down through the deposit to demonstrate the continuity, which was extremely successful, and you can see we had very long intersections of well over 4 grams per ton of gold.

We also had a cross cut because of our -- from our ramp we were able to access the mine, we took out a box sample with that cross cut also in the upper boundary zone went through 41 meters of 5 gram material. So obviously there is some very good gold intersections and gold mineralization in this deposit.

As I said before, our internal goal is to target 3 million ounces for the feasibility study we will complete probably early in 2009.

Slide 20 is a summary of the preliminary assessment report that was issued in June, producing 158,000 ounces for over 12 years at about $400 per ounce cash cost, and $300 million of capital.

Our objective has been sort of more aligned with what we've been saying as we identify more ores and optimize the mine production with that larger resource that we will have identified by the end of the year. Its to increase the production upwards to about 170,000 -- 175,000 ounces on the mine life will decrease accordingly.

Because of the higher production, the cash cost will then drop below $400 an ounce. We don't expect that the capital is going to change significantly with anything we would do moving forward. The current prices, the IRR of the project is around 10%.

Slide 21 is some of the project optimizations that are going on now between that preliminary assessment and the feasibility study, and there are a number of things that we're able to do now as we've got the drilling results and we integrate those in. And as the deposit grows, we will be focusing back in as we get the geotechnical information on how we schedule the ore release between the open pad and the underground and actually at what rate we will be planning to mine. You could see the throughput perhaps change somewhat as we get more returns available to us.

Also a key issue moving forward both on the cost side and the operation side is the backfilling requirement. Now we taken a very conservative approach and done a 100% backfilling. I hope that as we get the geotechnical drilling, which can have some impact on what we think in the underground will be. We will be able to step back a bit on some of the backfilling requirements.

Young-Davidson continues as we [pile-driven] all long too had very positive characteristics despite its relatively low grade. That's a very technological results in a simple flow sheet from a jurisdiction politically and these are an area where its in a mining region. We are the site of two fast producing mines and infrastructure is very [close], which we will keep down the capital cost. We have very good ground conditions underground, which is why we think that we can step back in the back drilling requirements ultimately when we have the geotechnical information to confirm that, very good tailings characteristics one has in generating and we think we can have a great long life at the Young-Davidson once we get it up and running.

Now like to maybe comment on our stock price over the past three months, I mean a lot of gold companies have been under some pressure. Its been very frustrating to watch our stock dropping vastly especially in the last month.

For various reasons I guess we can speculate what's happening. We don’t know if it’s hedge funds that had significant investments in Northgate. They've been falling on hard times and are modifying their position. But the investors are moving into larger cap gold stories or gold ETS and away from mid-tier producers like ourselves. Its always difficult to know for assurance till when looks back for time save and I guess we move everybody end of this year early next year. Quite simply it could be that the market is overreacting to our lower production in the short-term and the higher cost. This we've always put out as we've been making our changes down in Australia. This is has happened to us before, it's not again unusual for us. We've seen the share price decline in 2005 when the Kemess coal production dropped for about six months even though we thought bit was temporary and we are going to have very strong production after that.

The year later if you look back in to 2005, the share price had almost tripled up as well and the [interest] was falling as it should. But frankly, I don't I think I can or we can explain the recent trading behavior in Northgate stock but what I want to ensure all our investors is we have a plan and we are implementing it. We have I think long-term value in the company and we are exercising on it.

I think I would like to refer to slide 24 now, in Kemess, we've got very strong productions scheduled for Q4. It continues to generate strong cash flow in the current price environment and slightly various numbers are here tossed around. It has three year left out, it's not two years, not a year and half, it's not a two half year. It is three years.

At Stawell, we are updating our resource estimate just as we speak and we'll issue when we get some more drilling results, an updated mine life in Q3. And so within the next month or two, we'll have some more higher production in the second half of the year. But once again, this is a mine that had minimum investment put in, in the last 10 years. We're doing that. We're setting it up for the long term. We think there is more gold there. And we have a very strong team at Stawell, which we think can fundamentally deliver the results over the longer term.

At Fosterville, this is a mine I think we're truly commissioning. The former owner hadn't got through the commissioning phase. We have some expertise on this. We've done that at Kemess. I mean Kemess is a strong cash-flow generator now, but if you go back to 2000, it was a basket case. And that’s the worst time in the base metal and gold price that we've had in a long, long time.

We were successful turning that around, and we think we're going to be very successful at Fosterville. And that's reflected in our projections of much higher production and much lower cash costs in the second half of the year and moving forward. We've also, we think, positively identified means to significantly improve the gold recovery up by 10% or more. Our target probably is 90% long-term for this operation.

At Young-Davidson, this is a project that continues to amaze us, that – It's been everything and more than we expected. There are a lot of ounces at Young-Davidson we're going to identify over time. And this will be a long-life forward producer for Northgate moving forward.

So, I guess, in summary, I don't think that our present share price reflects the strong, underlying, fundamental value that's in the company, which we'll demonstrate over the next six months.

So, with that, I'd like to pass it back to you, operator, and we'll take any questions that might be out there.

Question-and-Answer-Session

Operator

(Operator Instructions) Your first question comes from Steve Butler from Canaccord Adams. Please go ahead.

Steve Butler - Canaccord Adams

Well, good morning Ken and Jon. Question for you Ken on CapEx guidance if you can provide any? I mean, a fair bit of money was spent as required I guess at Fosterville in Q1 $13.6 million. Any sense of the next couple of quarter of CapEx spend, is it we're looking at a fairly higher number for both Fosterville and Stawell and perhaps maintenance capital there after?

Ken Stowe

 

Yes. The some items that we transition in terms of the equipment purchases like the new trucks for the 60-ton trucks are going to Stawell and the 50-ton trucks from Stawell will be gong to Fosterville. That will be occurring in the third quarter. Obviously we’ll be –although we have – the in the anyhow start to be delivered in the third quarter. So there are few items like that to complete but the total cost of that conversion is around $25 million Australian.

Jon Douglas

We spend Steve only about $5 million on actual -- sorry, $8 million related to plant and equipment acquisitions, the rest of that $13 million that you're talking about is just normal development, underground development, which of course is capitalized.

Steve Butler - Canaccord Adams

 

Okay.

Jon Douglas

Yeah. We'll have another up to Ken's 25 we'll have another close to 17 in the second half of the year that we're spending there, a lot of which is actually going to be financed through capital leases.

Steve Butler - Canaccord Adams

That both the operation is combined.

Jon Douglas

 

Correct.

Ken Stowe

Yeah. And the total of that over the –I guess from when we started until we finish this 25 million.

Steve Butler - Canaccord Adams

 

Okay Ken. And then…

Ken Stowe

And that is [liability] when the equipment gets delivered.

Steve Butler - Canaccord Adams

 

Great. How about –is that inclusive of the CapEx required and you haven't provided a number maybe don’t have the firm number yet for the heated leach circuit at Fosterville?

Ken Stowe

 

Steve I don’t have number for it but it's going to be go a much lower number than that . We don't even have an estimate of it but it's a few million probably.

Steve Butler - Canaccord Adams

 

Okay.

Ken Stowe

It's a relatively small volumes of tanks and we are just engineering that. And now we expect in a month or so we'll have actually a better estimate or we all have an estimate on what that cost is.

Steve Butler - Canaccord Adams

Okay.

Ken Stowe

But the pay back on that project is going to be considerably less than a year we think.

Steve Butler - Canaccord Adams

Right. Ken, the throughput was little over the number looking for both Fosterville and Stawell in probably yield as well but -- what at Stawell 1877 tons per day does Stawell get up to in terms of your desire for throughput?

Ken Stowe

Stawell is especially 2000 tons per day operation.

Steve Butler - Canaccord Adams

Okay.

Ken Stowe

The Fosterville is a 3000 ton per day operation.

Steve Butler - Canaccord Adams

For Fosterville the plan is to get as high as 3000?

Ken Stowe

Yes. Exactly that's what's it designed for and that's what our plan shows moving forward when we get into 2009 that the mine will produce. The mine is just in the state and the underground we are moving from mineralization that's where we are mining now that's 5 meter stack will be getting into the heart of the, the meat of the orebody of the Phoenix orebody just touching it as we get into the third and fourth quarter where it goes to double the width.

Steve Butler - Canaccord Adams

Okay.

Ken Stowe

Where are your – I guess your tons per vertical meters is going to double as we move from where we are now or by the time we are at the end of the year.

Steve Butler - Canaccord Adams

Okay.

Ken Stowe

In Fosterville the tonnage's is going to come up and just get doubled. So those are running at about 60% at a time now only at Fosterville but ready and able to handle that extra tonnage and I guess in someway this maybe good we have that time in the next six months to get the recovery up. By we are putting it, we are probably losing 10% of that gold, so.

Steve Butler - Canaccord Adams

Okay.

Ken Stowe

And so then some good news with the, I guess the bad news.

Steve Butler - Canaccord Adams

Right. What can you say what percentage of your site cost at Stawell and Fosterville are fixed?

Ken Stowe

Maybe Jon has an idea.

Jon Douglas

Yeah it's not a figure that I have directly in front of me. Maybe I can get it for you later Steve.

Steve Butler - Canaccord Adams

Okay. That's fine. Young-Davidson, Ken what is your biggest area of focus or potential improvement to IRR because it was obviously a bit skinny at a lower price, but your biggest area of focus for improving the rate of return on this project.?

Ken Stowe

It's a larger resource, which we think is there, and I think anybody that looked at the detail at the drilling results could see that. As we've got more tons available, I think it will be the optimization with the geotechnical information we're just in the process of collecting, where we can show the engineers at EMAC earmark what the good ground is and confirm it on actual drilling results that it's that optimization of the mine plant, which weren't really able to do because we were a bit short on the minimum tons that we liked when we did the preliminary assessment.

We're going to have a lot more, tons we feel available to us which allow us to optimize the underground and the pit together to maximize the -- I guess the gold release. And we're also going to look at, maybe the operation can be slightly larger too can deliver -- and that's why you need more tons to be able to do that, and the -- I mean the drilling, the resource that we issued for the -- used for the preliminary assessment was done on a PIP model, that was from May 2007, and the underground part of it was from December 2007. We've done over 30,000 meters additional drilling, it's been extremely successful. So obviously the amount of tons underground has grown.

Steve Butler - Canaccord Adams

Right, okay. Thanks very much for all those answers guys. Thanks.

Operator

Your next question comes from Anita Soni from Credit Suisse. Please go ahead.

Anita Soni - Credit Suisse

Hi, good morning Jon, and I just had a question with regards to depreciation and what your unit costs for depreciation are at, I guess to my assumption, - they seem to be a little bit lower than...

Jon Douglas

Yeah, would have been lower than you had expected, that's because we depreciate things as ore is removed from the pit, we take the depreciation.

Anita Soni - Credit Suisse

So what you're at, per ton depreciation?.

Jon Douglas

Depreciation amortization, I am thinking on the order of $2 of ton but I all have to get that figure for you, but essentially we had depreciated for ore and we took the $2 million tons of ore of the Stawell in the quarter. So that have already been depreciated essentially.

Anita Soni - Credit Suisse

Okay.

Jon Douglas

So I think that's why you see that our depreciation was quite a bit lower than it would normally be at Kemess.

Ken Stowe

 

That's going to be a very longer third also because we will be taking a lot of material from Stawell.

Anita Soni - Credit Suisse

Okay.

Jon Douglas

So third quarter will be low also and then it will be more normal in future quarters.

Anita Soni - Credit Suisse

Okay. And can you give us some guidance on G&A at all three of your assets per ton?

Jon Douglas

 

Australians around $10 per ton mille , I mean as you appreciate it, it depends on how many tons we are putting through and Fosterville is not up to where one would expected to be. But I would say between $8 and $10 ton is reasonable down there at Kemess, we are whatever – $40 per ton Canadian.

Anita Soni - Credit Suisse

Okay. And I think that's it for my questions.

Jon Douglas

Okay. Thanks Anita.

Operator

Your next question comes from John Doody from Gold Stock Analyst. Please go ahead.

John Doody - Gold Stock Analyst

 

Hi, guys. Thanks for the complete briefing here. Couple of questions, one is on the shelf registration, presumably if that's to use for Young-Davidson and the next couple of years play out the way you're expecting in terms of the Kemess and the two Australian mines, you're going to throw up a lot of cash. Would cash flow be your primary preference to fund Young-Davidson?

Ken Stowe

 

Yeah I mean certainly I think it's sort of Jon Douglas said, certainly you know we take dilution pretty seriously and we preferred to do it that way, but metal prices one can never tell where they are going to be and especially copper prices being very important to how much cash Kemess throws of. The copper continues to be 375 that will be in future.

If it should drop to $2.50 that's another and we just want to make sure that we are prepared because when we start spending the money we want to make sure we've got enough ot to complete it. We don't want to have the Peggy Woody problems from the late 1990s where you we get into it and you run out of money part way through. We are going to make sure that we are fully financed going into whatever decision we make.

John Doody - Gold Stock

Okay, great. And so it's really a backstop rather than financing.

Ken Stowe

It's an option in which we want to have – our management teams who likes to manage with having options and not only to be forced into a certain situations.

John Doody - Gold Stock

Okay, good. And the other question is around Kemess and I wonder if you could give us updated guidance on gold and copper production for the three years remaining '09, '10 and '11?

Ken Stowe

I think we did that in our AGM I don't have it right in front of me but they were showing the numbers have been changed dramatically from that. If you go back and look at that you find the slide actually as I think that under the AGM presentation, as I remember was it was just under 200,000 ounces of gold next year around a 100,000 in 2010 and 50,000 ounces or 60,000 ounces in 2011 and those estimates haven't changed.

John Doody - Gold Stock

Okay, great. I'll dig those out and then the last question is what's the salvage value of the Kemess Mill, given the shortage of that kind of stuff around?

Ken Stowe

 

We found estimates on the past back in 2004 when we look in the Kemess North project and as an option once again we were considering what can we do at the infrastructure if we didn't use the Kemess North and at that time and obviously the equipment's was the lot more than, they would have had about $150 million value for the residual value used in another operation, and that's obviously worth more now, and today's environment is a lot different than 2008 than it was in 2004 and 2005.

And one of our strategies, and it's on the last slide in our presentation today, I didn't review it is to actually redeploy the Kemess assets into other projects. And that's one of the things that is high on our list of priorities that we're doing right now. As we get closer to the end, those assets would be even worth more, and there'd be more opportunities. We're looking at other projects where we could pick up the Kemess operation and move it.

John Doody - Gold Stock

Great. Thank you very much.

Operator

Your next question comes from David Christie from Scotia Capital. Please go ahead.

David Christie - Scotia Capital

Morning guys. Just a quick question on the cash cost guidance, mostly for Fosterville I guess. You have it going basically in half from this quarter to next, and just sort of want to have an idea of how you're getting there. And I understand what went wrong in this quarter, but what's -- what's can I get us to the half mark?

Ken Stowe

Dave, it mainly function of the ounce that come out of it and if you look at the production, the production is forecast to almost double. So, if you take that number, whatever it was this quarter, that will get you down most of the way. And as part of the transition to owner mining, there was one-time costs that are built into the $1,150 like...

David Christie - Scotia Capital

How much were those one-time costs?

Ken Stowe

The pilot plant work they were doing is being cost as a big expense, and there's a number of items that were expense and not necessarily capitalized.

David Christie - Scotia Capital

Could we get an idea how much those were?

Ken Stowe

So far, pilot plant expenses -- about $300,000. There may be a million of various charges that somewhat are related to the transition from -- to owner mining. And keep in mind, we're also expecting we able to -- only had a one month where we were not on an owner mining basis and we've got two things there first of all we're buying new equipment which will transfer operating cost if you will into depreciation ultimately because we were paying the contractor for his equipment essentially when we were doing the old [test type] of mining.

And then the second thing is we will be more efficient. There were a number of things in terms of items that we procure that we've now made significantly better arrangements.

We are purchasing on the order of 10% to 20% reductions in some of these costs and then of course just the efficiencies that we perceive will come out or having our own guys doing the mining. Having contractors doing development is always been reasonable way to do things. But you really don’t want them get your ore because they don’t necessarily mine for – they mine for tons as opposed to mining for grade. And with our own people will churn a mine for the best grade, we think there is going to be better efficiencies in that.

Also Dave fundamentally you are getting into work end of year end into the future, it will be orebody will be. We are in the thinnest part of your body right now at the top you be into a orebody that is twice is big and that means your development per ton produced is going to be less. That's a large chunk of what you spend underground.

David Christie - Scotia Capital

 

Right.

Jon Douglas

 

That's obvious the fundamental for the operation are going to change. And if perseverance, you have this asset, it would have been underground a year before they were. We'd be in that part of the ore body now and they might still exist.

David Christie - Scotia Capital

I understand you expect the 30% more production this quarter and again another bit for next quarter. I just other than, I guess you said your $162 per metric ton Australian. Was the cost to ore mined, what portion of that was sort of extraordinary equipment purchases and cost as far as changes the operating mining, can you separate that at all?

David Christie - Scotia Capital

Well. Our equipment purchases are capital, so it wouldn't have been in there.

David Christie - Scotia Capital

So what portion about is not recurring?

Ken Stowe

A $1.5 – Well like I said $1.2 million or $1.3 million of that is non-recurring.

David Christie - Scotia Capital

So the 17 million, $1 million or $2 million?

Yes. But keep in mind that there is kind of product fixed cost associated with what we are doing here. It's a -- and when we get into the part of the ore body, it doesn't cost to that much more to get those incremental funds.

David Christie - Scotia Capital

Okay. Thanks.

Ken Stowe

Thanks, Steve. I think I'd just like to remind everybody and as I stated that, but it is repeated fundamentally Fosterville is a newer shallower mining and Stawell is within a couple hours drive and that Stawell can consistently produce gold at $500 and ounce, there is no reason why Fosterville can't and shouldn't.

Operator

Your next question comes from [Bryan Glass] from CIBC World Markets. Please go ahead.

Bryan Glass - CIBC World Markets

Hello guys. I was just wondering about your transportation cost, at Kemess you gave some guidance that they were increasing but not how much?

Ken Stowe

Essentially the rail arrangement that we have was [CN] includes a freight, fuel surcharge that relates in the most recent contract to the price of diesel fuel in the United States, So the higher prices for diesel fuel mean a higher freight cost and that can vary anywhere between 10% to 20% of our base rate, which the base rate let say is 100 bucks, you know you can have $10 or $20 more per ton, maybe even up to 25, when you're peaking at -- on $150 or $140 per barrel oil, that's going to be when it's highest. And that's variable as we go along in time.

Bryan Glass - CIBC World Markets

And can you put that into the cost per ounce or a cost per ton though? You've got the $100 for the cost per ton I guess, but can you put it on a per ounce basis?

Jon Douglas

Let see. Each ton of ore contains let's say 1.5 ounces - $20 for 1.5 ounces.

Bryan Glass - CIBC World Markets

Okay, so that $100 was the actual figure, not just a basis for description?

Jon Douglas

No, it was close.

Bryan Glass - CIBC World Markets

Okay, thank you.

Jon Douglas

You're welcome.

Operator

Your next question comes from Howard Flinker from Flinker & Company. Please go ahead.

Howard Flinker - Flinker & Company

I got a few questions. Ken, when you mentioned prospects of 10% IRR at Young-Davidson, I presume that inferred or included only the 2.11 million ounces in your mine and not what probably...

Ken Stowe

That's right, I did baked in the number, if you calculate it for the preliminary assessment report.

Howard Flinker - Flinker & Company

Right. Not the number that would probably be higher by the end of the year?

Ken Stowe

Yes. That probably it will be higher.

Howard Flinker - Flinker & Company

Okay. The others are for Jon probably, they're numerical questions. In the other comprehensive income, the $15.7 million of unrealized gain, is that an Aussie currency markup in effect?

Jon Douglas

Correct.

Howard Flinker - Flinker & Company

Okay.

Jon Douglas

Some of the auction rate -- oh, okay -- yeah, that's correct, it's mostly Aussie rate.

Howard Flinker - Flinker & Company

Okay. Also, in the cash flow statement, change in fair-value of forward contracts, a positive item. What is that? Is that a reversal of some copper hedging losses that went through the income statements?

Jon Douglas

Yeah. Exactly. We had at March 31st a number, there were some April hedges that rolled off, which we paid cash for. So cash went out and decreased that and so the remaining liability went down. There is that note 17, if you want to take a look on our website and it will take you through.

Howard Flinker - Flinker & Company

Note 17?

Jon Douglas

Yes.

Howard Flinker - Flinker & Company

Okay. And finally I wasn't clear because the question you answered before about CapEx had various parts to it. Of the $23.3 million in CapEx in the quarter was that almost all that in Australia?

Jon Douglas

No. I think we break that CapEx in the press release for each of the operation. So…

Howard Flinker - Flinker & Company

Oh, you do. That's right. You do.

Jon Douglas

We'll do the necessary, it was three -- the others about 6.5 at Stawell and other 13 at Fosterville and that's a combination of development in the 200 ground mines as well as capital related to ventilation at Stawell as well as…

Howard Flinker - Flinker & Company

 

Right.

Jon Douglas

Owner mining conversion at Fosterville.

Howard Flinker - Flinker & Company

So it's 20 million Aussie and 3 million Kemess?

Jon Douglas

Yeah.

Howard Flinker - Flinker & Company

Okay. Thanks guys.

Jon Douglas

You’re welcome Howard

Operator

(Operator Instructions) Your next question comes from [Bruce Mahon from Mahon Investments] Please go ahead.

Bruce Mahon - Mahon Investments

Good morning gentlemen. Was there a copper hedging loss in the second quarter?

Ken Stowe

 

There are copper hedging loss, yes, we -- some copper hedges rolled off in April and the price in April was higher than our hedge price. So there was a negative effect which had already been booked to a certain extent but yeah there we paid that cash in April.

Bruce Mahon - Mahon Investments

Was there a mark-to-market loss on the hedging for 2009 to 2010?

Jon Douglas

About 100,000. Prices at the end of the two quarters were pretty much in line, so there wasn't any additional loss that ran through the income statement.

Bruce Mahon - Mahon Investments

Okay. So if we took out the write-down for the ARS, the earnings would have been positive, it's correct?

Jon Douglas

The write-down on the ARS is in other comprehensive income because we are viewing it as a temporary impairment still. So it was not in the net income.

Bruce Mahon - Mahon Investments

Okay.

Jon Douglas

There were no real effect – I think what perhaps you are thinking at this we had in previous quarters a lot of adjustments that you could say they are really related to quarterly operations. In this quarter we really didn't have any that were of any significance.

Bruce Mahon - Mahon Investments

Okay. Yeah that's what I was getting at.

Jon Douglas

What do you see is what it was.

Bruce Mahon - Mahon Investments

Okay. And Ken the downtime that you spoke of at Kemess South due to power failure. Was that in Q1 or Q2?

Ken Stowe

Yeah. Some of those in Q1, we also had in April. We had the substation, the BC Hydro substation down at the end of our line actually. They had some incidents and we lost complete power, save for a couple of days and then we run pressure power for a few days and that was in April. So despite that we actually had a very, very good quarter through the mill.

Bruce Mahon - Mahon Investments

Okay. Thank you very much.

Ken Stowe

Thank you.

Operator

Your next question comes from David Christie from Scotia Capital. Please go ahead.

David Christie - Scotia Capital

Hi guys just want one more question on the DD&A for Fosterville and Stawell, it was quite high for the quarter is that sort of where is it going to run going forward?

Jon Douglas

Yeah, I wouldn't perceive it to be -- I mean, we're depreciating it based on a new EPA allocation of things, and that's where it's going to be going forward. It will depend on of course, total output, right, Because again, you're depreciating it based on how many tons you're mining.

David Christie - Scotia Capital

For per unit of production, right?

Jon Douglas

Right. Now at Stawell, as Ken has alluded to, we're expecting to see a significant reserve increase there. I would expect to see that rate come down a little bit.

David Christie - Scotia Capital

When is that going to happen, the reserve increase?

Jon Douglas

Well, like we said, we're going to be putting out a new report on this in the third quarter of this year.

David Christie - Scotia Capital

So, you are not going to see DD&A change till the fourth quarter at the very earliest then?

Jon Douglas

I would say so, yes.

David Christie - Scotia Capital

Okay. So, the two hundred and whatever dollars for Fosterville and $300 for Stawell that's there right now is probably going to continue at least for another quarter end.

Jon Douglas

Now Dave I think unless you change the -- unless we fundamentally change the reserve base, I don't think that number is going to change.

David Christie - Scotia Capital

Okay. Thanks.

Jon Douglas

Okay.

Operator

Your next question comes from [Larry Passim] from Raymond James. Go ahead.

Larry Passim - Raymond James

Good morning.

Ken Stowe

Good morning.

Larry Passim - Raymond James

Ken, I just wanted to mention that it's my feeling that the pressure on the stock to a great extent comes from that filing of the shelf perspectives. And I'm just wondering, in your opinion what set of circumstances would greatly reduce the chances of that shelf being used? Would it be largely related to metal prices or something else in your mind?

Ken Stowe

Well obviously there's -- yeah, metal prices have a huge impact. The metal that we produce, through our success at Fosterville, and Stawell, and at Kemess will have a huge impact on that. We continue to be successful in what we're doing the we'll generate the. cash we expect. So it's really, anything that has as significant affect on our cash flow. And we are building our cash balance after the purchase of the Australian assets. By the a way the [EPS number] was with no dilution.

But we are not – we don’t have a track record of diluting our shareholders. So our first objective is not to do that. But it will be a shame to have the Young-Davidson project complete the feasibility study, a very positive project and besides that we don't want to do it. Because we might not have all the dollars that we might need to complete it.

So it is an option, we put it there and I think you can rest assured do it to have the minimum dilution that we require in order to achieve it. If there is no dilution that would be the best outcome.

Larry Passim - Raymond James

What about the question of [pay row] with Lehman Brothers and that area there? If that was corrected and will that have an effect on it?

Ken Stowe

It obviously have huge impact. We would like to have our $72.6 million back.

Jon Douglas

A quick revolution to that would be helpful certainly.

Ken Stowe

That would go long way to giving us the cash flow we're going to have to building Young-Davidson.

Larry Passim - Raymond James

Okay. I just looking for a few things down the road to be alluding for and you have answered my question. Thanks very much.

Ken Stowe

Well, Jon alluded to in our ARS we are pushing very higher that the Lehman to get that money back including putting in a statement of claim saying they have done us wrong. just wrong.

Larry Passim - Raymond James

I see that -- that's very positive. Thanks very much.

Operator

Your next question comes from John Bair from SKA Financial Services Inc. Go ahead.

John Bair - SKA Financial Services Inc

Good morning gentlemen. Just kind of a follow-up on that ARS issue, if I understand or I am reading this correctly I guess that you are trying to get Lehman to not only forgive the $44 million roughly that was – became due in June which would kind of take care of little over half of that total fees, was that correct?

Jon Douglas

About 60% yes.

John Bair - SKA Financial Services Inc

Yeah. Okay. So that certainly if that gets resolved then that's a big step in perhaps that – I know arbitration takes a while to get through. Do you have any sense as to when that might be heard?

Ken Stowe

I think to be honest we shouldn't go into too much details on this anyhow, because it's going to the arbitration.

John Bair - SKA Financial Services Inc

Yeah.

Ken Stowe

But under normal circumstances, it might be a year. The question is there is a lot of financial service related arbitration and law suits there, right.

John Bair - SKA Financial Services Inc

Right.

Ken Stowe

To us or anybody else there is a lot of this going on and I'm sure we are not the only people who have a problem that we are seeking to resolve in this way, so the question is how long that will take.

John Bair - SKA Financial Services Inc

Sure. I'm sure the queue is quite long for that kind of stuff, a follow-up I guess on the fuel cost question, you addressed it to the shipping cost from [Arroyo] but here recently of course crude's come down a little bit, are you seeing any decline in fuel costs for your mine operations, as you mine the pits and so forth and what percentage would you say of your costs might improve, should start to drift back or at least stabilize instead of rising up?

Jon Douglas

We consume a total of perhaps 26 million liters of fuel per year amongst our various operations. So, you know, you could work at the math on that basis and come up with a pretty good estimate of our total expenditure under various scenarios I think.

John Bair - SKA Financial Services Inc

Are you seeing any…

Jon Douglas

I mean, we don't have any hedges in previous years. We've hedged fuel rather successfully in '05 and '06. We don't have any hedges this year, so our prices were ride up and down with whatever the market is doing.

John Bair - SKA Financial Services Inc

Okay.

Jon Douglas

Oh yes, we were -- if we were looking at May there, or June, things were pretty high

John Bair - SKA Financial Services Inc

Right.

Jon Douglas

And they come off as crude prices come off.

John Bair - SKA Financial Services Inc

Okay. Well I guess what I'm directly drilling at is, seeing it from the regular gasoline pump prices – I am in the Cleveland area I've seen prices drop. We're getting three -- mid 3.60s now for regular gas. So that almost a $0.50 drop. I can't say what I -- I haven't been in tune with diesel costs, butcare you seeing any of that decline?

Jon Douglas

No, we see some of the decline again; different markets are different.

John Bair - SKA Financial Services Inc

Sure.

Jon Douglas

So I couldn't get any split in that detail, but…

John Bair - SKA Financial Services Inc

And I don't have any sense obviously in the Australian market what's going on there, but I could see where that could perhaps help your operations out quite a bit there too.

Jon Douglas

That's true.

John Bair - SKA Financial Services Inc

Last question. Are there any other associated minerals with Young-Davidson and your other two operations that could help out? I mean, you're pretty much focused on gold and copper...

Ken Stowe

Young-Davidson, there's a small amount of silver, but in the overall economics is insignificant there is nothing else in Australia beside gold.

John Bair - SKA Financial Services Inc

 

Okay. Thank you very much.

Ken Stowe

You are welcome.

Operator

Your next question comes from David Christie from Scotia Capital. Please go ahead.

David Christie - Scotia Capital

Hi guys just one more quick question I just want to confirm in the revenue line Jon that’s what I gain about $0.02 for the court settlement right?

Jon Douglas

About a $1 million is under other income I believe actually Dave. You see there is a line down its negative it is negative 740 there is another item in there that was another expense and the net was that amount.

David Christie - Scotia Capital

Okay. What else in the revenue line in this quarter you have?

Jon Douglas

What else is in the revenue line?

David Christie - Scotia Capital

When you add up I guess there is some interest income in there below this line.

Jon Douglas

 

Our interest income is down and net interest below. It should just be the small amount of mark-to-market change on the hedge book which was insignificant, it has paid it, that we paid it during the quarter for those April hedges and then…

David Christie - Scotia Capital

That's are April hedges?

Jon Douglas

Of existing stock.

David Christie - Scotia Capital

April hedges good response, thank you.

Jon Douglas

 

You are welcome

Operator

Your next question comes from [Bruce Mahon from Mahon Investments]. Please go ahead.

Bruce Mahon - Mahon Investments

Yeah my question was on the ARS and it was answered. Thank you very much.

Ken Stowe

Thank you.

Operator

There are no further questions at this time please continue.

Ken Stowe

 

Thank you operator that concludes our prepared remarks for today, and I thank everybody for attending, asking some various type of questions. Since there is no more questions I would like to close the conference call. But first like to remind you that you can get a replay of the conference call by dialing 416-640-1917 or toll free 1-877-289-8525 using the pass code 21275847 followed by the number sign. Please visit our website at www.northgateminerals.com. Thanks a lot and good day.

Operator

Ladies and gentlemen this concludes the conference call for today. Thank you for participating. Please disconnect your line.

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