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Executives

Theresa M. Thom - Vice President of Investor Relations

Scott A. Caldwell - Chief Executive Officer, President and Director

Stephen M. Jones - Chief Financial Officer and Executive Vice President

Analysts

Sam Crittenden - RBC Capital Markets, LLC, Research Division

John Charles Tumazos - John Tumazos Very Independent Research, LLC

Trevor Turnbull - Scotiabank Global Banking and Markets, Research Division

Shawn Campbell - Macquarie Research

Michael Parkin - BofA Merrill Lynch, Research Division

Steven Butler - Canaccord Genuity, Research Division

Zachary Zolnierz

Ron Stewart - Dundee Capital Markets Inc., Research Division

Michael Gray - Macquarie Research

Barry Cooper - CIBC World Markets Inc., Research Division

Matthew Zylstra - Northern Securities, Inc., Research Division

Allied Nevada Gold (ANV) Q3 2012 Earnings Call November 5, 2012 11:00 AM ET

Operator

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Allied Nevada Third Quarter Financial and Operating Results Conference Call. [Operator Instructions] I would like to remind everyone that this conference call is being recorded today, Monday, November 5, 2012, at 11 am Eastern Time. I'll now turn the conference over to our host, Ms. Tracey Thom, Vice President, Investor Relations. Please go ahead.

Theresa M. Thom

Good morning and thanks, everyone, for joining us this morning. On the call today, Scott Caldwell, our President and CEO; and Steve Jones, Executive Vice President and CFO, will discuss the third quarter financial and operating results that were released this morning before market, and you can find them on our website and in EDGAR along with the third quarter report. This call will be followed by a question-and-answer session.

Before we begin, as I always note, we may make certain statements that will include forward-looking information. For additional information, I refer listeners to read our cautionary statements regarding forward-looking information contained in our press releases and on our website.

Now I'll turn the call over to Scott Caldwell.

Scott A. Caldwell

Thank you, Tracey. First, on behalf of Allied Nevada, we hope that all of our friends, colleagues and all those affected by hurricane last week are safe. Our thoughts are with you during this extremely difficult time.

Moving on to Allied. The best way I can describe this quarter is the good, the bad and the ugly. I'll start by talking about the bad and ugly.

Safety. We suffered 2 lost time accidents during the quarter. Although both of the incidents were minor in nature, any time you find yourself looking at a couple of incidents -- lost time incidents, in a 3-month period, you know things aren't going that well. Production and sales were both lower than we expected. The major cause of the shortfall is lack of Worton [ph] plates under leach. And pretty simple, this whole oxide expansion is really simple. Mine more tons, leach more ore, produce more gold. We just didn't execute.

We have solved the problem. We got hit by some high turnover with the opening of a mine that we didn't anticipate the effect on us. We lost a lot of people. We got a rigorous training and recruitment program in place, we've hired a training manager and we're back to training equipment operators. But all the seats are full and we've got excess operators now. So if we have a high turnover, we're in good shape.

Proof's in the pudding. Monthly ore tonnage announced is place, record levels in the September and again in October. We're confident the mine will achieve design ore and metal production levels from here on out. In addition, this is really into the '13 now, we've been able to move our electric shovels forward another year, i.e., into 2013 from '14. We're now doing the mine planning to see what kind of favorable impact that might have on our production profile [indiscernible], et cetera.

Now for some carbon. The 4,700-ounce adjustment, was [indiscernible]. If you recall, we had over 250 tons of carbon [indiscernible] site. But we looked for a off-site sales agreement and we were able to execute that, and Steve will talk about that. More importantly, the problem's solved. As we continue to run the carbon columns, carbon strip plan is fully operational and we won't see a loaded carbon inventory, a large loaded carbon inventory, again. And that strip plant operates at a fraction of the cost, and of course, we don't have any freight to process that carbon.

The ore reserve model reclassification. It's a minor issue, but to date, last holes are showing 3% more gold and approximately 20% more silver. So in other words, the rock is containing more metal. One of the areas we mined over the last few months, last holes have indicated a 15% reallocation of heap leach ore to mill ore. We solved this so that we don't have to move this mill ore unexpectedly, i.e., mine more tons and put it in a stockpile. We stockpiled about 700,000 tons this last quarter. We moved a couple of exploration drills in the area and they're drilling shallow holes just so that we can go around the mill ore if indeed, if it exists, and just leave it in place and only mine the oxide or the heap leach ore.

Operating costs. Way above our normal number at $690 per ounce, and you can see from the press release, these abnormally high operating costs are due to a number short-term issues, all of which we'd solved. Ore trends are up dramatically, waste tons are down, down to where they should be for the next few months. Carbon strip plant is operational, and we're doing the definition drilling to make sure we can leave the mill ore in place rather than having the mine at the stockpile.

In the organizational front, we've implemented a number of changes to our organization. These personnel changes will improve our performance in the technical, operating, financial forecasting, and the health and safety areas. So we're excited about those changes, moving on with those changes, and some of them have been implemented. A few will take place over the next week or two.

Moving onto the highlights for the good of the whole conversation. Construction of the heap leach and the mill is proceeding very well. Our owners team is in place and I can't say enough of the good things about the team that Carl Gonzales [ph] has put in place there, a very experienced group. Construction workforce is over 200 people today. North Leach pad, which is part of the oxide expansion, is proceeding very, very well and is on schedule and budget. Gyratory crusher, which is the first portion of the mill, is moving ahead and we anticipate that to be operational sometime late in the second quarter or third quarter, early third quarter of next year. Mill excavation, this would be for the grinding circuit, is going fantastic. Looks like it's going to be ahead of schedule and on budget.

Probably most importantly, if you look at the bigger picture, we've committed a little over $550 million or 44% of our capital cost, 44% of the $1.24 billion. And it's in line with our feasibility study estimates. We see no reason to alter that capital, the overall capital cost estimate. And that $550 million is a firm commitment, i.e., no escalation to that. So almost half of the cost is this thing has been locked in, if you like. I'm talking of the mill amount.

All the short-term production issues can and will be fixed. Doors leaching is expected. The blast holes are confirming tons and grade. A little bit about exploration, the Hycroft infill program, as we expected, we'll be talking about that early next year. Intend to update the Hasbrouck PEA based upon the new drilling and other work we've done on that. And again, that will be either Q1 to Q2 of next year. And the same with Wildcat, the drill programs are completed and we're going to update all the studies.

With that, I'll turn it over to Steve, and Steve will talk a little bit about the financials.

Stephen M. Jones

Thank you, Scott. Let me take everybody through the financials starting with the balance sheet. We ended the quarter with $502 million in cash. That means that basically, we spent $75 million during the quarter. That's indicative of the mill expansion being in full swing. And when I talk about the cash flow statement here in a minute, I'll give you an idea of where that money was spent. Related to cash, or more specifically, related to future capital needs, we increased our revolver. We closed that transaction last week. It went from $30 million to $120 million. We added 3 banks, we now have a total of 4. The covenants and borrowing rates were substantially the same as to what we had previously had. And we extended the term from May 2014 to April 2016. We're very happy to welcome as partners Commonwealth Bank of Australia, National Bank Canada and Société Générale, in addition to our prior sole lender, Bank of Nova Scotia, and we look forward to working with them in the future.

If you look at inventory, you'll note that it declined $6.4 million during the quarter. And that's due to the sale of the carbon. As Scott mentioned, we did sell the carbon and we ended the quarter with only 2,285 ounces of gold on carbon. You can see that detailed out in Footnote 3.

Total ore on the leach pads, both current and noncurrent, grew by $13.2 million during the quarter. That includes the impact of the 4,700 or 4,697-ounce adjustment related to the re-assaying of the carbon. Just to be clear on that, we didn't lose any carbon. When we went out and re-assayed the carbon, we thought we had loaded more gold on the carbon. Turns out we hadn't, that gold still remains in the heap. We have not altered. As Scott said, the recovery still looked good, so we've not altered that. So 4,697 ounces is now shown as ore on the leach pads. We did adjust production, you'll see in our press release, during the quarter as we had counted that as production in previous quarters.

Importantly related to the ore on the leach pads, the average cost per ounce of gold has decreased by $22 per ounce during the quarter. As we started to realize the benefit of more efficient production of gold in September, as Scott referenced, and you can see that in Footnote 4.

But we did finalize during the quarter our 2011 tax return and we elected to take bonus depreciation, which accelerated depreciation deductions for tax purposes. Now that had no impact on the overall effective rate, which remains at 25%, but it did result in a receivable of $4.8 million. And you'll see that in Footnote 5.

Looking at the liability side of the balance sheet. You'll note that capital leases increased by a net $21.7 million. We now have a total of $99.1 million in capital leases. During the quarter, we added $26.4 million in capital leases and then also had $4.7 million of principal repayments for net of $21.7 million.

Moving onto the income statement. You'll see revenue grew $15.2 million up to $64.8 million during the quarter. There's a very nice detailed breakout in our footnotes -- Footnote 10 of revenue. You'll note that gold, we sold 34,851 ounces. That compares with 26,971 ounces, third quarter, a year ago. And our second quarter of 2012, we sold 17,762 ounces. Big increase in the sale of gold and that's primarily due to the fact that we sold 14,403 ounces of gold on carbon. You will see on the balance sheet a receivable of $22.6 million related to that sale, and we will collect that receivable just after the first of the year when the carbon is finally processed and will collect the receivable at that point in time.

Our silver sales were 177,000 ounces as compared to 112,000 ounces from third quarter a year ago. Overall, silver sales were up $1.2 million from the prior year. As Scott mentioned, adjusted -- our adjusted cash cost per ounce are much higher than normal at $690. We did spend $2.3 million in selling cost to move that carbon. Additionally, the silver-to-gold ratio on the carbon is about 2.1, significantly lower than our normal experience. Overall, that on a per ounce of gold, the impact of the higher selling cost and lower silver was about $97 an ounce.

Additionally, we did place fewer tons on the pad, as Scott mentioned, and we mined a higher proportion of waste tons than we have projected. That resulted in higher per ounce cost of about $85. We did see a drop in both the mining cost per ton and in processing cost per ton of ore mine in the third quarter when compared to the second quarter. And our expectations for the fourth quarter, are for significant improvement. Scott mentioned, and as we outlined in the press release, we had much higher ore tons, recoverable ounces on the pad in October. We expect to have a continued higher tons in recoverable ounces on the pad for the remainder of the quarter, lower overall strip ratio, and so we expect our overall, our fourth quarter cost to be much lower. However, we do have higher per ounce inventory cost that we have to work our way through in the fourth quarter. Thus we're projecting adjusted cash cost for the fourth quarter of $585 an ounce.

Scott mentioned the exploration, we spent $3 million for the quarter. That's about $3.8 million less than we had spent prior year quarter, it's about $1.8 million more than what we spent in the second quarter. And as Scott mentioned, the focus was on Hasbrouck, in Wildcat. And our plans are to update the resource block models in the fourth quarter. And then as Scott outlined, take it 1 step further early next year. We did expand $7.9 million of interest related to our senior notes and capital leases. It's the first quarter that we've had significant amounts of interest expense related to our senior notes, and obviously, this will continue as we go forward. I mentioned our overall effective rate of -- tax rate at 25%. That is less than the statutory rate because of the percentage depletion and adoption. Overall, we had pretty solid net income of $13.4 million, or $0.15 a share.

We look at the cash flow statement, the number that I really focus on is cash flow from ops. That was $13.8 million during the quarter. We did benefit from our tax election and an overall reduction in current taxes payable. But we did have some working capital offsets, the biggest one being the $22.6 million in receivables I mentioned. And as I mentioned, we'll collect that in the first quarter. So that will be a nice a significant increase to our cash flow from ops then. And we also increased ore on the leach pads and stockpiles.

In the investing activities, you can see just the progress we're making on the expansion. You'll note in the cash flow statement, it shows $64.9 million of cash spent. That the bottom of the statement, you'll also note $26.4 million in capital leases and then another $19.8 million accrued in payables. So overall, $110 million.

Some highlights of where the money went, 5 haul trucks, $24.6 million; we made some payments on the SAG, the ball and regrind mills for $16.2 million; SAG ball and regrind motors of $6.3 million; we spent $8.8 million on excavation, both in the gyratory pit as well as the mill pit; $8.3 million on our secondary and tertiary crushers; $6.3 million with our engineering contract; and we acquired 2 production drills for $4.6 million; and $4.5 million spent on the north pad. You'll also note, we added $9.4 million to restricted cash during the quarter. As you recall, we received in August the positive record or the decision with respect to our environmental impact statement for the expanded heap leach operation. That allowed us to begin mining in Bay and also allowed us to begin constructing both the north and south heap leach pads. Because we're helping up in additional areas, we had to make additional deposits with the BLM.

Finally, very little cash flow from financing activities during the quarter other than the previously mentioned $4.7 million of capital lease principal payments.

And that concludes kind of a summary of where we are from a financial statement perspective and the highlights of our financials. And with that, let me turn it back to Scott.

Scott A. Caldwell

Thanks, Steve. We'll now open this session to try and answer the questions you might have.

Question-and-Answer Session

Operator

[Operator Instructions] The first question comes from Sam Crittenden from RBC Capital Markets.

Sam Crittenden - RBC Capital Markets, LLC, Research Division

A question on the ore reclassification. Was that in the Brimstone Pit? And what sort of depths did you encounter that sulfide material?

Scott A. Caldwell

It would've been primarily actually cut 4 or 5, but yes, it would be -- so if you're looking at the plan, it would be western side of the deposit, so west of Brimstone. And what we're looking at there from surface, we're probably 250 meters deep or so. And so we're -- in 1 area of the pit, it happens actually to be the west side, we're seeing pockets of mill ore. We really want to leave it in place right? So we would rather not mine it. It's not necessarily unexpected, what we've put drills over there. We're doing high density drilling, i.e., closed-space drilling so that we can not drill it and blast it and just leave it behind, not accrue the cost right now.

Sam Crittenden - RBC Capital Markets, LLC, Research Division

Okay, thanks. And then a question on grade for next year. I think in the feasibility study it's got 0.011 ounces per ton. Is that still a good number or does this higher-grade Bay area potentially help the grades in 2013?

Scott A. Caldwell

I believe the grade -- we're doing the mine plan right now. I believe the grade's going to be slight -- similar to the grades you're seeing this year. So slightly higher.

Sam Crittenden - RBC Capital Markets, LLC, Research Division

Okay. And then, just one last question for me. In the quarter, the recoveries were fairly low, is that a timing thing placing in ore at the end of the quarter? Should we see a lift in recoveries in Q4 or in the sort of the lower recovery area of the mine?

Scott A. Caldwell

It is a timing thing. In other words, you take any incident in time, we place so many ore tons, October and September, and we'll continue November, December. But that being said, the recoveries of Bay, the Bay area are 52% compared to Brimstone at 56%, so they're slightly lower. So our overall blended recovery is going to be sitting at about 54% once we get all the Bay Area ore on the pad.

Sam Crittenden - RBC Capital Markets, LLC, Research Division

And is that a reasonable number for next year then?

Scott A. Caldwell

Yes, it would be in that range, you're correct.

Sam Crittenden - RBC Capital Markets, LLC, Research Division

Assuming before you start crushing it?

Scott A. Caldwell

Exactly. Once we crush, recoveries will go up nominally by about 10%, and that the crushers' due to be operational late Q2, early Q3.

Operator

Your next question comes from John Tumazos with Tumazos Very Independent Research.

John Charles Tumazos - John Tumazos Very Independent Research, LLC

Scott, there a lot of cutbacks by other mining companies, some of them more specific than others. Barrick has talked about cutting a great deal of CapEx, although not necessarily specifically to Nevada, but you would think that Nevada would not be accepted. While [indiscernible] cuts have more been to staff in Indonesia and Peru. Do you see any changes in availability of refractory processing capacity in Nevada as the larger companies slow down spending?

Scott A. Caldwell

I believe -- John, it's a good question. I believe that the capacity or the demand for concentrate in Nevada, i.e., the shortfall of sulfides, will continue regardless of the cutbacks. I think the demand is actually expanding, and that's what we're seeing, in the future as opposed to contracting. And on those cutbacks, what we're really seeing is the availability of personnel and equipment, i.e., the cost of things also going down. But if backed to the demand, it certainly looks like it's going to increase, not decrease, in the future years.

John Charles Tumazos - John Tumazos Very Independent Research, LLC

So it's definitely worthwhile for you to build your own plant?

Scott A. Caldwell

We'll build -- John, I'll be honest with you, I don't know what size plant will do, but we'll have some sort of oxide. Right now, we're leaning towards PAX or have designed a PAX, i.e., autoclave system. And it will process about 1/3 our production. Might scale that down if indeed the concentrate market loosens up or if there's more demand for our product.

Operator

Your next question comes from Trevor Turnbull from Scotiabank.

Trevor Turnbull - Scotiabank Global Banking and Markets, Research Division

Scott, I guess the first question, just -- I know you were looking for higher grades in the second half of the year and they weren't necessarily there in Q3. Was that partly a function of hitting some of this high-grade that you wanted to leave in place? When you change that part of the operation, is that part of the reason that the grades haven't come up, or was that something really wasn't expected until Q4 anyway?

Scott A. Caldwell

Really wasn't expected until Q4. If you look at the Bay Area, we've split it in half, South Bay, North Bay, focusing on the South Bay first, which was lower-grade so that we can shorten our mill excavation waste haul and put the waste -- we're going to mine the ore out and the waste is actually going to go on top of the mined out pit. So it was always the intent to mine the South Bay and then move to the North Bay where we see the higher grades on North Bay and we're in the North Bay now in a big way. It was always fourth quarter-weighted, if you'd like. October, November, December is just the way we scheduled it so that we could put that waste short haul.

Trevor Turnbull - Scotiabank Global Banking and Markets, Research Division

Okay. And then looking at Q4, with 60,000 ounces coming in Q4, some of that I assume is higher solution grades going into the plant. I was wondering if you'd give us a sense of how much of those have gone up. But also, is that a function of being able to do carbon stripping as well as on-site?

Scott A. Caldwell

It's a function of both. First, the solution grades. The solution grades have more than doubled since last quarter. We're up around 0 1 6 to 0 2 0 ounces per ton depending on the area that we're actually drawing the solutions from. So the solution grades have gone way up, and that's a function of stacking and higher ore grades that are coming out of the Bay Area. So it's going well. and then of course, stripping the carbon, we eliminate that build up of inventory. Steve talked about what we have some carbon -- our sale was our sale in September, late September. The plant is up and commissioning so we actually produced gold on carbon and we're not able to strip it for about 20 days or so. We load our carbon to a little over 100 ounces per ton right now, but we're stripping more than we could produce on a weekly basis. So yes, it's a function of both getting into that sales factor. To give you an idea, the month of October, if you looked at our sales plus our available for sale, we had an excess, we sold or could have sold, if we tried to pour out, we did not play the overtime, et cetera, just for a month-end. But we could've sold anywhere from 15,000 to 17,000 ounces. So if you do the math, things have really ramped up and it's all a function of getting the ore out there. Again, I said it's real simple. If we execute, if we mine the ore tons, we'll get the gold. If we don't, we won't.

Trevor Turnbull - Scotiabank Global Banking and Markets, Research Division

Okay. And then if I just ask a quick question on the capital. It looks like you've probably got about $550 million left to go on the budget. Can you give us a bit of a breakdown on how much of that is already committed through capital leases and so forth? We know how much is committed in obligations, but can you tell us how much of that is, say, capital leases versus deposits and things like that?

Stephen M. Jones

Trevor, why don't we just do that offline. Happy to break it down and details for you.

Operator

Your next question comes from Shawn Campbell from Macquarie Capital Markets.

Shawn Campbell - Macquarie Research

Just a quick question on the cash flow statement. The excess tax expense from stock-based awards went up in the quarter. Can we maybe get just a bit more on what that relates to?

Scott A. Caldwell

Steve?

Stephen M. Jones

Yes. That basically relates to -- well, it goes back to the election of bonus depreciation. So -- and you may or may not be familiar with bonus depreciation, but in that U.S., they allowed in 2011 basically to accelerate significantly our depreciation expense. And we had -- and the effect of that was basically, as I mentioned earlier, we actually have a receivable and we've actually received actually some of that in February and October. And then if we also, you'll see we actually booked a deferred tax liability. And the excess tax benefits, I'm going to say, are a type of deferred taxes and they relate to, specifically, to compensation expense. And as a result of the election of bonus depreciation, if you will, we ended up booking additional deferred taxes and reduce the excess tax benefits. That's the simplest, simplest explanation I can give you.

Shawn Campbell - Macquarie Research

Okay. On the interest that was expensed in the quarter, going forward, it was said that, that would continue. Was there any consideration to capitalizing a significant portion of that towards the project?

Stephen M. Jones

Yes. No, we do capitalize some towards the project. And you'll see probably in the latter half of 2014, when our construction and processes are at much more advanced stages, you'll see a -- you may see the whole amount be capitalized. But you'll continue to see interest expense in the fourth quarter and into the first and second quarter. I said '14, I meant '13, sorry. And then as we get into the latter part of 2013, you'll start to see, because of the capitalized -- because we'll be capitalizing much more interest, you'll start to see that amount come down significantly.

Shawn Campbell - Macquarie Research

Okay, and that's a function of the amount spent time to the certain cap rate and that limits you on what you can capitalize?

Stephen M. Jones

Exactly.

Shawn Campbell - Macquarie Research

Okay. And just on the pregnant solution and then the contained gold in that, so when the carbon sales were made and the 4,600 ounces were not in there when it was re-assayed, so that amount is still in the solution. Is the grade in the solution based on a assayed or tested amount, or is it based on the sort of heap leach model? And what is estimated to have been removed from the ore?

Scott A. Caldwell

No, the grade -- the solution grades are assayed. We sampled them every -- periodically during every shift. We have roughly 15 cells or 15 areas under leach and each one of those is sampled for a volume. We measure the volume of solution, and then it's sampled for grade, both gold and silver. Our focus is primarily gold in the heap. And then that is how we determine what to feed the plant and what goes to the lean pawn back up but this assayed -- we determined we take a fire, we also -- excuse me, we take an AA and we also take a fire assay, ultimately, fires what we use for our grade calculation and metal production calculations. So it's what's in the solution and then what runs through your plant, so we -- our plant process is about 6,500 gallons a minute, and that's between Carbon and Merrill-Crowe, but we're pumping about 12,000 gallons a minute, so about 1/2 of the solution goes back up and then stacked to the -- to improve our solution grades and that's why our grades are popping so rapidly as the stack is starting to see the effect.

Operator

Your next question comes from Mike Parker from Bank of America Merrill Lynch.

Michael Parkin - BofA Merrill Lynch, Research Division

This is a couple of question. For the sales for sales for fourth quarter, what are you guys expecting for that, and if you have the recoverable silver stack for the month of October to go along with the gold number you provided?

Stephen M. Jones

Yes, for sales, we're looking at about 6x our gold sales.

Scott A. Caldwell

360.

Michael Parkin - BofA Merrill Lynch, Research Division

Okay. And is that something that should -- with your carbon plant online, is that something you should be -- that factor being something that would carry through 2013, too?

Scott A. Caldwell

Yes, it should carry through '13. In other words, we got to hit this quarter because we sold so many ounces of gold on carbon in a given quarter. But now we it will go steady-state. We'll be -- in other words, we'll be selling carbon -- processing carbon and recovering the gold on a daily basis if you'd like. So you won't see this huge impact with it. To answer your question on the stacked silver -- do we have the -- I just got to take the calculator out. Roughly, the 0.198 -- how many ore tons do we stack? We'll stack about 1 million, 1.1 million ounces of silver, contained silver.

Michael Parkin - BofA Merrill Lynch, Research Division

Then on to -- I have a follow-up question to the question on your solution ponds, you have -- I guess, you'd have a no one [ph] contained ounces in the solution in all your fluid? Do you have that number?

Scott A. Caldwell

I don't have it, but yes, we do have that in the inventory number. But yes, we track that on a monthly, daily basis. We can tell you in any given time. And maybe as we find that number, we can move on another question and then we could just -- we'll just rattle off the numbers. Steve's looking for it right now. But yes, we track it, and yes we do have all the ounces and solutions. It's a big number, just ask our audit committee.

Stephen M. Jones

Mike, if you look at Footnote 3, we breakout in process and we show 40,866 ounces. And it's 38. -- well, rounds of $39 million that's in solution.

Scott A. Caldwell

That's based on assays of the solution on a multiple times per shift, right, with actually about everything.

Operator

Your next question comes from Steve Butler from Canaccord Genuity.

Steven Butler - Canaccord Genuity, Research Division

Scott, you alluded to a pretty good September and even better October. You gave us the October mined production of 4.8 million tons, Scott. With September, it sounds therefore that July and August were maybe miserable months, but how was September versus October and I assume are you still looking for more of the same even improvement in November, December for tons of ore mined and stacked?

Scott A. Caldwell

Yes. If you look at -- September was roughly 3.7 million tons of ore. And again, we're -- September and October were on the lower grade portion of the Brimstone or the Bay Area pit. We're now moving into the higher grade, so we anticipate the ore tonnages to be similar to October, so well above design. Design is 3 million tons. That's -- our goal is to place -- if you look at the feasibility study, roughly 3 million ton of ore per month. Perhaps, more importantly, you're going to still see around 30,000 or thereabouts, perhaps, even a little bit higher of recoverable ounces placed on the heap in November and December, so the trajectory is in the right direction. I think we're poised to have a very strong fourth quarter, and quite frankly, a very strong fourth quarter, no matter how badly.

Steven Butler - Canaccord Genuity, Research Division

Scott, the Merrill-Crowe capacity, remind us again of the additional Merrill-Crowe plant and its timing of its completion.

Scott A. Caldwell

Yes. The Merrill-Crowe plant that we're constructing now, which is associated with the north leach pad, the excavation is completed and we've gone out for bid on the foundation for the structure. It is a 20,000-gallon per minute plant, and so it could obviously process all the solution we're running right now. But as we get more ore under leach, the capacity of the plant will be fully utilized, though quite frankly, I think you're going to be running not only the new Merrill-Crowe plant but the old Merrill-Crowe plant and the carbon columns. You're going to want to process this pregnant solution and strip some of that 40,000 ounces out of inventory as quickly as you can. If we get -- if we have the capacity, all those ounces will be coming out. And so -- and that plant will be operational 1 June, perhaps a little bit ahead of that, but again, 1 June is the target, as well as the north leach pad.

Steven Butler - Canaccord Genuity, Research Division

And the current plant is what GPMs?

Scott A. Caldwell

5,000 gallons per minute. And the carbon columns are 1,500 gallons per minute. So we're going from total capacity of 6,500 to 26,500 in another 6, 9 months.

Steven Butler - Canaccord Genuity, Research Division

Okay. I think that's pretty much it, Scott. Oh, yes, I guess, Steve, for you. The effective, I guess, expensed stripping ratio in the fourth quarter you guys alluded to is some inventory costs will come into cash cost, if you will, so even though that the strip ratio is -- but below or trending below 1:1, the effective strip ratio from a cash plus point, if you will, will be about what number approximately?

Stephen M. Jones

Well, yes, it's the inventory, so if you look in Footnote 4, and you look at our inventory for ore on the heap pads and then the solution that we just talked about, effectively what happens is your current period costs go into that inventory calculation. And so we're basically at the higher cost -- the higher cost that we've spent really for the strip ratio for the full year are still impacting us in the fourth quarter. So it's really not a calculation of -- I mean, we're going to have a lot of strip ratio, so we'll actually produce "cheap ounces" in the fourth quarter, but we still have to make out of inventory, and if you will, work through the higher ounces, the higher cost ounces that we put on the pads earlier this year. So that's the impact, that's why you don't get an immediate impact when you drop your cost if you've had higher costs in prior quarters or vice versa.

Operator

The next question comes from Zach Zolnierz result is from GMP Securities.

Zachary Zolnierz

I guess, first of just a follow-up on the this last question on the cash cost. So I know in the fourth quarter, you'll be working through some of that higher inventory, but can you give us maybe a sense on what the quarter exit run rate for cash cost might be for fourth quarter?

Stephen M. Jones

Not sure what you mean by that, Zach, exit run rate.

Zachary Zolnierz

Meaning, I mean, the 585 will be -- per ounce will be for all of the fourth quarter, but as you work through that inventory when you produce this lower-cost ounces, maybe what we could expect going into the first quarter or early next year?

Stephen M. Jones

Yes, so maybe a way to answer that is, you work through those high-cost ounces in the fourth quarter and assuming your fourth -- first quarter looks something like the fourth quarter, you're back down in that under $500 range.

Zachary Zolnierz

Back to where you guys were in the previous guidance essentially?

Stephen M. Jones

Right. And then if you continue -- if we continue to have quarters like we expect in the fourth quarter, you'll work your way down toward the low 400s, but that's a long way out and we're still working on a mine plan. But directionally, that's how it would work.

Zachary Zolnierz

Sure. And then, I guess, on that same topic. I think you mentioned in the prepared remarks about the mining and processing cost per ton, that you saw a little bit of drop there? Can you give us some color on what those amounts were per ton?

Stephen M. Jones

Yes, so if you look at our mining cost per ton, we're down under $1.60 a ton. And our processing cost per ton are -- in the per ore ton are in the $1.50 range and dropping. A lot of the processing costs are fixed, frankly. So you'll see a huge drop in this next quarter.

Scott A. Caldwell

Don't -- this is Caldwell. Don't forget, we are short tons. So if you want to convert to metric, you got to add 10% to those costs.

Zachary Zolnierz

Yes. That's very helpful, guys. And then, I guess, just my last question. I guess, you talked about October, and clearly, it's running quite well. I guess, in the past, you've talked about total material for 2013, somewhere around 80 million tons. Is that still the case or are you running maybe a little better than expected as far as what we could look for next year?

Theresa M. Thom

Zach, this is Tracey. We're working on the mine plan right now and we expect to have that -- the 4-year guidance out sometime in January of next year for 2013. I think what you're referring to is what we put in our life-of-mine plants in the previous April 2012 technical report for Hycroft. We expect to be somewhere near that magnitude, however, we'll have a final answer when we complete these mine plans to get our 2013 guidance out.

Scott A. Caldwell

One of the big changes, Zach, is the ability or the opportunity to move the large electric shovels forward from '14 to '13. And we're looking at how that could impact us. And so my gut level is that tonnage is going to be higher, hopefully, more ore tons as well as more waste tons. And I think that's going to benefit us in the short term, as well as the long term, the short term being '13 and the long term being the middle. So we're working through that right now. It's a very interesting opportunity and we haven't really understood the impact yet on the financial side, but we're working on that. But it's a -- it was a recent opportunity because of some cancellations and equipment I'm guessing out of the U.S. coal industry, but I'm not positive. And so we're looking at moving things forward and seeing how that can impact us in the long-term. And so that tonnage rate could go up if indeed it makes financial sense for us in the short and long term.

Operator

Your next question comes from Ron Stewart from Dundee Securities.

Ron Stewart - Dundee Capital Markets Inc., Research Division

Scott, Tracey, everyone. Scott, I was curious about the rope shovels you had indicated 2013 as opposed to 2014. You don't have a timeline then on when you might be able to get them, right?

Scott A. Caldwell

We -- right now, Ron, if we made the decision, we believe we can have the first shovel operational in the third quarter of 2013 and the associated bits that go with the drills, trucks, operators, et cetera. We're working through that mine plan. We could have all 3 shovels operational before the end of the year, and yes, we have power. Believe it or not, we figured that one out, that we need electric power to run these things. So we have the power, we have the areas to mine, now it's just due to mine plan and see what we can benefit, but we have locked them up if indeed it gives us a favorable economic return. And I'll be amazed if it doesn't. Every time I've worked with a low-grade deposit over the last 35 years, mining more tons will make more metal, if we execute, we'll make more metal. And so I think it's -- I think it's going to be a very interesting mine plan once we get around that. And the goal is, in the future, if you remember, we actually had the fourth electric shovel in our feasibility study out, and I think it was 2016, we think that we might be able to eliminate that fourth shovel and reduce our overall capital requirements for the project by about $50 million or so, but the mine plan will tell us. But we're pretty excited about it. And unexpected, we've got a call and we said, "Yes, let's talk about it. " And -- but yes, the first shovel could be operational Q3 of next year, all 3 by the end of 2013.

Ron Stewart - Dundee Capital Markets Inc., Research Division

Right. And the bigger year brings down unit costs, because I was looking on your description of waste mining cost. You said year-to-date, it moved 8.6 million tonnes of waste at a cost of $15.8 million. When I did the math, I got a waste mining cost of around $1.85 a ton, short ton. So that would clearly indicate that, that's a moving target in so far as what Steve was saying about mining cost at $1.60 a ton?

Scott A. Caldwell

Yes. Part of the waste mining was done by a contractor. Some of the development waste, it's all expensed. We used the contractor with 777-size trucks or 100-ton trucks and loaders and so they were -- they skewed that waste mining cost up significantly. But if you look at electric shovel, and I mean, people -- it depends on your power cost, of course, and your labor cost, but our electric shovel will mine for about $0.20 per ton, good-sized shovel with 3-plus -- 3 pass load of 320-ton truck and our hydraulics are about $0.35 a ton, so I'm talking just loading cost per short ton. With significant operating cost savings, if nothing else, you go after the operating cost savings, but we're more interested in the long-term impact on metal production/overall mining rates.

Ron Stewart - Dundee Capital Markets Inc., Research Division

And you basically said, Scott, that you're aiming to move or place 3 million tons of ore per month under leach. That's -- would imply 100,000 tons a day of ore mined and placed under leach. Do you have the capacity, the leaching capacity to do that and will you be there by the end of the year in terms of 100,000 tons a day under leach?

Scott A. Caldwell

Yes. We -- the last 2 months, I'll talk to October, we mined in excess of 120,000 ton per day, the same in September ore and put under leach. The key to next year's plan is to have -- we're fine on leach pad space. It starts to get tight July or August of next year's, call it July. So we really need to have the first cells of the north pad available when we begin stacking ore and put under leach. The Merrill-Crowe plant is less essential. That can slip if something had to move, but it really looks like we're in pretty good shape. We need to get more of the pictures posted on the website so you can take a look at it. But High Mark is a contractor there. He's ahead of plan. It really looks like we'll be able to begin putting ore on the north leach pad, and obviously, the entire leach pad won't be completed, just the bottom cells, which is where we need to start stacking first.

Ron Stewart - Dundee Capital Markets Inc., Research Division

So we can feel reasonably comfortable about the production ramp-up going forward into '13?

Scott A. Caldwell

Yes.

Ron Stewart - Dundee Capital Markets Inc., Research Division

Okay. The last question I have for you is in respect to the silver. You were saying you're expecting about a 6:1 in Q4 with 60,000-odd ounces of gold Q4, that would be 360,000 ounces of silver. Can you explain how silver jumps from what you had in Q3 to Q4? Just clarify that for me.

Scott A. Caldwell

Probably the biggest, Ron, would simply be the large number of carbon ounces that were sold 15, what was it? 15,000, 14,000, whatever the number was. 14,000 ounces of carbon all sold in one quarter, and the silver on that is around 2.5 to 3:1 the ratio, so 3 ounces of silver for every ounce of gold. And so you're going to still be selling silver carbon, but it dribbles in on a daily basis. So you'd go back to our historic levels if you look at earlier in the year or late last year when we were still -- late last year when we're still processing carbon offsite, so we dribbled that in. But the biggest change is we're not going to be selling a huge amount of gold on carbon in one quarter to the tune of 13,000. The most we'll be able to do, we're loading about 100 ounces a day in carbon, so you can do the math. We might get 9,000 ounces of gold on carbon, so roughly half. So that's the biggie, plus we're seeing silver grades creep up, so I really think it's going to be right around 6:1.

Operator

Your next question comes from Michael Gray from Macquarie.

Michael Gray - Macquarie Research

Scott, just one question on the revised mine plan in January. Will that include the plus $30 million of metallurgical work you've been doing and will that be in a revised feasibility?

Scott A. Caldwell

Yes. The $30 million on net testing is -- primarily, it was -- a lot of it was drilling. I don't have the exact breakdown, but we had -- we drilled large diameter core focusing on the first 5 years of operation, figuring that if we get the first 5 years right, we've got the overall NPV right. And so we focused on that, but yes, all of that work will be included in that. And as soon as we get the final met test reports back, we've got most of the results -- as soon as we have the final met test reports back, we intend to have a metallurgical press release out and update prior to that so people can see what we've seen, and basically, it's conformational, slight improvements here and there, but you'll see what we've looked. But all of that work will be included in that. We're working on a -- like we do year, we're working on a concentrated marketing plan, meaning calling around for future concentrate sales, and so that will be reflected in it. We will not have a revised capitalized cost update. We will reflect anything we know about, but the full-blown revised capital update will not be available, unfortunately, until April. And that's a function of we want to get a couple of big contracts awarded, so we'll know exactly what it's going to cost for the grinding area, i.e., the foundations. We know what the equipment's going to cost, but I'll call it the installation cost. Those bids are due to be back in March. So again, if there's a material change we're aware of, of course, we disclose it immediately. But as of yet, everything looks pretty good on the capital front. So essentially, there'll be an update to the 43-101 at Hycroft. The new drilling, we had a bunch of infill drilling here and it came back as we expected, That'll be reflected in it. So there'll be a full-blown update coming out in on and the target is to have it out late February, early March.

Michael Gray - Macquarie Research

Okay. News release in January with the technical report to follow February, March?

Scott A. Caldwell

Yes, we're -- yes, well, as soon as we have to release the -- when will the ore reserve come out, Steve, February?

Stephen M. Jones

Yes, February.

Scott A. Caldwell

February. The technical report will be ready in February. The day we announce the ore reserve, the technical report will get posted.

Operator

[Operator Instructions] Your next question comes from Barry Cooper from CIBC.

Barry Cooper - CIBC World Markets Inc., Research Division

Just wondering your positive reconciliation there, can you break that down into what was grade related or what is tonnage related?

Scott A. Caldwell

We can give you the exact numbers, but essentially, what we're saying just in layman's discussion, is that, we're seeing slightly fewer on gold, slightly fewer tons, slightly higher grade, the net being 3% more contained ounces. On silver, the reconciliation, again, where we've mined to date. So blast holes, a big chunk of that material was never assayed for silver so all that we have is some very sparse drilling that we did up high, for example, in the Brimstone. We did not redrill that, so the silver reconciliation -- we know what's happening there, we -- but we don't -- we're not going to redrill it to confirm our silver up high. We think as we get deeper in the deposit, i.e, it's going to tighten much closer. Unfortunately, we don't think we're going to see a 20% variance on silver, so slightly fewer tons, slightly better grade, net-net is basically gold spot on at 3%.

Barry Cooper - CIBC World Markets Inc., Research Division

Right. Then why was Q3 -- you'd indicated that the grades were going to be so much higher and yet they were so much lower, and I recognize that some of it was pealed off and held in inventory. But if we look at Q3, was that pretty much what you expected? In other words, the reconciliation there was pretty bang-on as well? Because it's not like you were kind of implying partway through the year.

Scott A. Caldwell

What happened to us or the decision in Q3 is that we focused on the southern portion of Bay Area which reconciles very well. Because we wanted to mine the ore so that we can stockpile waste or deposit the from the crusher acts excavation into the pit, so it's part of its tied hand-in-hand with the capital program, i.e., we get the ore out and there's a very, very short haul, a matter of a few meters to back fill this pit. And the mill was not going to go on that, that would a laydown yard, but we're after that haul. So we altered the plan, went after some lower grade material, and now the higher grade material to the north, where there is no waste plant to be deposited, is what we're starting to mine now.

Barry Cooper - CIBC World Markets Inc., Research Division

And then the final question. Your carbon inventory that you sold, was that a onetime sale or have you kind of entered into a contract there to sell additional carbon while your own plant is being built there?

Scott A. Caldwell

Our plant -- we intend not to sell -- we could, if we had to but we intend not to sell any more carbon oxide, it's just the cost savings/metal price realization or profitability. Our plant, very, very simple plant is fully operational now. Now it'll strip about 30% more carbon than we're capable of producing or loading. And that's operational and we think that that's going to strip carbon at just a fraction of the cost, but probably around $25 to $50 an ounce total costs as opposed to what we paid for the offsite and the freight -- there's no freight, but it is fully operational and we're slowly gaining ground on our inventory.

Operator

Your next question comes from Trevor Turnbull from Scotiabank.

Trevor Turnbull - Scotiabank Global Banking and Markets, Research Division

Yes, just a follow-up. I was wondering, what kind of application rates are -- do you have on the leach pad now? How many gallons a minute are you putting down?

Scott A. Caldwell

We applied, depending on ore type, but the average is about -- as high as 02. Okay, now this is gallons per second per foot squared, all right? So this is a nice to metric to talk to. We could go to penny rates or something here shortly a guess. So at any rate, the application rate on the Bay Area ore is 025. On some of our other ores, it goes as low as 020. Right now, it's about 025 on the Bay Area. And so if you do the math, we've got 4 million or 5 million square feet under leach right now.

Trevor Turnbull - Scotiabank Global Banking and Markets, Research Division

So just to put in the context of when you were talking about, having capacity for -- I forget, the Merrill-Crowe was 5,000 gallons a minute, in the Carbon plant, 1,500, to put it in those kind of terms, what are your application rates?

Scott A. Caldwell

If you look at those kind of application rates, we're probably -- so if you look at the water that's physically going through the plants, it's probably -- if you want to look at that way, it'd be about 2/3. So if you want to 025, 017.

Trevor Turnbull - Scotiabank Global Banking and Markets, Research Division

Sorry, I guess I'm not really making it -- what I was trying to understand is, I thought you were putting down on the order of 8,500 gallons a minute and yet -- or you were creating 8,500 gallons of pregnant solution a minute and only able take off about 6,500 gallons to the process plant?

Scott A. Caldwell

That's correct.

Matthew Zylstra - Northern Securities, Inc., Research Division

Okay. So I guess what I'm wondering -- so right now you're doing still about that 8,500 gallons a minute currently?

Scott A. Caldwell

Coming down from the plant, it's closer to 9,500 gallons a minute. And 65 goes to the plants, 3,000 gallons a minute, which is probably an average grade of about, say, 010 or so goes back up on to the heap and we stack solution, i.e., we put that solution, goes into our lean pawn and it goes on top of the best grade ore we've got under leach.

Trevor Turnbull - Scotiabank Global Banking and Markets, Research Division

Okay. And when you get the north leach up and running, kind of what kind of -- instead of 9,500, how high does that go?

Scott A. Caldwell

We expand it to -- we hope to get it in excess of 20,000 gallons. So we'll be pumping up about 30 and 20 coming back.

Operator

There are no further questions at this time. Please continue.

Scott A. Caldwell

Well, in conclusion, we faced a number of short-term challenges during the quarter. Like I said before, we had a pretty ugly quarter and I know it's -- not real happy with it. And most of the issues have been solved, none of the challenge relate to the underlying fundamentals of the project, gold and silver and the rock will come out, capital costs of the mills are looking well, the model is performing well, so the gold and silver is where we think it would be in the rock. All in all, we had a rough quarter from health and safety through production and sales. I think we've got it solved. I mean, a number of us -- most of us have been through this time again with previous lives, previous companies. We know what to do, we're executing.

Thanks, again, for spending a few minutes with us this morning. And we're going to be in New York, Boston, Toronto over the next few days, and I'm sure talking on the phone to a lot of you about any more questions you might have. Talk to you later.

Operator

Ladies and gentlemen, this concludes the conference call for today. Thanks for participating. You may now disconnect your lines.

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