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Executives

Camilla Bartosiewicz – Manager-Investor Relations and Communications

André Jean Douchane – Chairman and Chief Executive Officer

Jeffrey A. Swinoga – Chief Financial Officer and Vice President

Greg R. Struble – Chief Operating Officer and Executive Vice President

Analysts

Andrew Mikitchook – GMP Securities LP

George Topping – Stifel Nicolaus, Inc.

Benjamin Asuncion – Haywood Securities, Inc.

Mike Parkin – Bank of America/Merrill Lynch

Annie Zhang – Octagon Capital Corp.

George Topping – Stifel Nicolaus, Inc.

Nathan Littlewood – Credit Suisse

North American Palladium, Ltd (PAL) Q3 2012 Earnings Call November 8, 2012 9:00 AM ET

Operator

Good morning, ladies and gentlemen. Welcome to North American Palladium’s 2012 Third Quarter Results Conference Call and Webcast being held on Thursday, November 8, 2012 at 9:00 am Eastern Time.

I would now like to turn the call over to Ms. Camilla Bartosiewicz, Director of Investor Relations and Corporate Communications. Please go ahead, Camilla.

Camilla Bartosiewicz

Thank you, Matt. Good morning everyone and welcome to North American palladium’s 2012 third quarter results conference call and webcast. The company’s financial results were issued yesterday, and they are available on our website at nap.com.

Our presenters today are André Douchane, NAP’s Chairman and Interim CEO; Jeff Swinoga, Vice President, Finance and Chief Financial Officer, and Greg Struble, Vice President and Chief Operating Officer.

Please be advised that the information discussed today is current as of November 7, 2012, unless otherwise indicated and that comments made on today’s call may contain forward-looking information. This information, by its nature, is subject to risks and uncertainties and, as such, actual results may differ materially from the views and expectations expressed today. For further information on these forward-looking statements, please consult the company’s relevant filings with SEDAR and with the US Securities and Exchange Commission.

Lastly, please be reminded that all currency amounts discussed today are in Canadian dollars, unless otherwise stated, all references to production ounces refer to payable production. All tons are in metric tons.

And now I’d like to turn the call over to André.

André Jean Douchane

Thank you, Camilla and thank you everyone for joining us this morning. During the third quarter, LDI delivered steady operating results and accomplished a number of critical development milestones. In the third quarter, LDI produced approximately 38,000 ounces of palladium at an average cash cost of $423. The realized palladium selling price was $632, giving the operating margin of $209 per ounce for a total margin of almost $8 million, with nearly a 120,000 ounces of palladium produced to-date at a cash cost of $412. We believe we will meet our 2012 production guidance of between 150,000 ounces and 160,000 ounces of palladium and we expect to be near the higher end of our cash cost guidance.

Our third quarter financial performance was, for the most part, within our expectations, although compared to the same quarter of last year, we were negatively affected by a lower realized palladium selling price, no sales contribution from Sleeping Giant, a one-time cash cost that we incurred with in relationship to the flood and its mitigation efforts, as well as higher electricity, labor and smelter costs.

During the quarter, we also accomplished a $43 million convertible debenture financing, which has strengthened our balance sheet and will certainly help facilitate our LDI mine expansion. The LDI mine expansion continues to be our number one priority. Through an investment of $93 million to-date for this nine month period, we have achieved a number of important development milestones that we have – and have considerably reduced our execution risk for this project.

Having recently traveled to mine site, the progress is very clear to see on service and underground. With the $93 million spent to-date on the expansion and with the major components of the mine expansion well advanced, we look forward to 2013 when the company will transition operations and start utilizing the shaft.

When the expansion is completed, Lac des Iles has excellent prospects for improved operating margins. It is also one of only two primary palladium companies in the world with leverage to the rising palladium price, which continues to benefit from a solid supply demand fundamental. The expansion program at LDI will be the main driver of our future growth in production and cash flow. Additionally, we believe in significant palladium exploration potential, which we have in the area and within close proximity of the area.

We are dedicated to building long-term shareholder value by realizing our vision of becoming a low-cost mid-tier producers to the completion of the mine expansion. We believe that this value creation will ultimately be reflected in our share price, as we expand our operating margins and return to steady profitability. We’re appreciative of all of our shareholders who have continued to stand by us and sincerely value your patience as we complete our transition.

And now, I’ll turn this over to Jeff to discuss the financials.

Jeffrey A. Swinoga

Thank you, André, and good morning, everyone. Starting with our financial performance for the third quarter, total revenue was CAD36 million, compared to CAD38 million in the same quarter of last year. Third quarter total revenue is primarily lower when compared to last year, due to a number of reasons.

LDI sold more ounces this quarter but at a lower realized palladium price. LDI’s realized palladium selling price for Q3 was $632 per ounce, compared to $742 per ounce last year. And there was also no gold revenue recognized this quarter with the closure of the Sleeping Giant gold mine at the beginning of this year. And finally, gold sales from Vezza are being capitalized until the mine achieves commercial production.

Looking at total operating expenses in the second quarter, they were CAD36 million, compared to just less than CAD36 million in the same quarter last year. Excluding the operating expenses from Sleeping Giant, LDI’s operating expenses increased primarily from mining and processing more tonnage from the open pit and higher costs of contract labor, power, parts and supplies, fuel charges compared to the same period last year.

As Greg will describe for you shortly, operations in the third quarter were somewhat affected by the underground flooding that occurred following a severe rainstorm in August. The one-time restoration costs that were incurred related to pumping, as well as surface and underground mitigation efforts, which amounted to about CAD1.6 million in the third quarter and totaled CAD2.3 million in the nine month period for the two floods. We also expect to have some minor costs from the flood in Q4. And just to clarify, these costs are excluded from our cash costs.

Now speaking of cash costs, Q3 costs were impacted by an increase in LDI’s electricity cost. Broadly speaking, there was an annual re-assessment of the LDI’s power usage during peak consumption hours, which resulted in an increase in power costs from July 1 of this year until June 30 of next year. The new rates will vary and will be determined based on consumption levels. However, in general, we expect an increase in cash costs by approximately CAD25 to CAD30 per ounce for this new period.

Net loss for the quarter was CAD8 million or CAD0.05 per share compared to a net loss of CAD2.8 million or CAD0.02 per share in the same quarter last year. Adjusted net loss, which excludes exploration costs, mine closure and care maintenance costs and one-time payments, was CAD2.5 million, compared to CAD900,000 in the same quarter last year.

EBITDA was negative CAD500,000 for the quarter. Excluding exploration expenses, mine closure and maintenance costs and one-time payments, adjusted EBITDA was CAD5.1 million in the third quarter. And finally, cash used in operating activities before changes in non-cash working capital was CAD0.5 million.

Now looking at our capital spend during the third quarter, NAP invested CAD40 million in development and capital expenditures, which includes CAD34 million at LDI, of which CAD28 million was towards the mine expansion plan, and CAD6.3 million at the Vezza gold mine. Now until Vezza reaches commercial production, all costs will continue to be capitalized, as I mentioned before.

Now part of the underground – part of the development costs for LDI include capitalizing CAD2.7 million related to necessary upgrades to our to tailings management facility. Due to the two severe rainstorms we had this year, the extra water in the TMF accelerated our timeline for the upgrades to the TMF that were initially planned for 2013.

Our nine-month total CapEx for both Ontario and Québec is CAD126 million, which includes CAD103 million at LDI, of which CAD93 million was towards the mine expansion. Now with the substantial development investments already made, the capital spend is not expected to differ materially from the CAD116 million we budgeted for this year. And so far, we spent CAD22.7 million at the Vezza gold mine. Now, capital spending at Vezza is expected to be minimal in the fourth quarter.

Now turning to exploration, during the third quarter, we had spent CAD3.1 million in exploration costs. We also spent another CAD300,000 in exploration expenditures that were capitalized in connection with infill drilling for the LDI mine expansion project.

Looking at the balance sheet, during the third quarter, the company issued CAD43 million in convertible debentures. As of September 30, 2012, the company had CAD61 million in working capital, including CAD23.5 million of cash on hand. Regarding our $60 million bank facility, which is secured by accounts receivable and inventory and is used for working capital liquidity, at September 30, we had $28.2 million available under this facility. Also, LDI’s new smelter contract has shorter payment terms and period, which means that we will be receiving double smelter payments in October and November, estimated at $25 million.

And now, I’d like to turn the call over to Greg to discuss our operational and development activities during the quarter. Greg?

Greg R. Struble

Thanks, Jeff. Overall, LDI achieved solid operating results during the third quarter. As Jeff mentioned, operations during the quarter were minimally affected by the rainstorm that we experienced in August. The team at the site reacted quickly and efficiently and ensured the safety of all our employees, and they deserve some good credit there. Going forward, our water management systems have been upgraded and should mitigate future underground flooding, should we experience other severe rainstorms.

Moving on to our production now. As you know, our 2012 production plan includes the blending of underground and surface ore. Our third quarter production came in line with our expectations, however, included some alterations to our original plans, as we had to differ some of our underground production because of the flooding.

To briefly recap, our production results from the third quarter were nearly 38,000 ounces of payable palladium from approximately 504,000 tons of ore that were milled, the majority coming from the surface. Our average head grade at the mill was 3.3 grams per ton and a recovery at the mill has been consistent at around 77%.

Cash costs during the quarter were $423 per ounce, which is higher than our guidance, mostly due to the following factors. Flooding, which caused us to alter our mining plans, whereby less volume was produced from the underground and at a lower grade, as there was proportionally more surface ore than underground ore.

We had the impact of increased electricity costs and we also saw the higher labor costs that included a retroactive wage increase under the new LDI Union Agreement that was signed in September. Additionally, higher smelting costs pursuant to our new smelter agreement that was finalized during the second quarter.

Now looking at our operations for the nine-month period, production stands at approximately 120,000 ounces and cash costs are around CAD412 per ounce. We believe that we’ll meet our annual guidance of ounces between 150,000 and 160,000 and expect that we will come in at the higher end of our cash costs closer to the CAD400 per ounce range.

With respect to the mine expansion, we recently held the conference call on October 15, during which we provided a detailed update on the mine expansion progress. The webcast from that call is still on our website if anyone wishes to access the replay. To summarize, we continue to see positive progress and have confidence in the new development schedule. Since that update, not much has changed, other than I confirm that the major components for the production hoist have arrived on site and the installation of the hoist in progress. Looking at this picture of the mine expansion construction site, the steady progression is clear to see.

And now, I’ll turn the call back over to André for some closing remarks. André?

André Jean Douchane

Thank you very much for joining us and listening to everything and thanks, Greg. Before we open the call up to the questions, I just wanted to make a few brief comments about the palladium market as we currently see, experiencing a little bit of a temporary weakness. Palladium spot prices dropped average around $613 in the third quarter ranging from a low of $563 per ounce to a higher of $697 per ounce. Despite this volatility in price, the supply and demand fundamentals of palladium remains strong.

The supporting factor behind the positive outlook for the metals’ future performance is resilient industrial demand, increasing investment demand and constraining global supply. As we saw the stats released last week, all sales in North America are up year-over-year, which combined with anticipated growth in China should help keep the palladium demand firm.

On the supply side, a multitude of issues affecting South African PGM miners who produce almost half of the world’s supply of palladium, do not appear to have any immediate solutions to their problems and are likely to jeopardize mine supply.

So, in closing, as a remainder of the year, we will focus on advancing our mine expansions, exploring divestiture opportunities for the gold division assets and advancing our ongoing near-mine greenfields palladium exploration programs. With respect to some of the upcoming milestones, as many of you are aware, we’re currently in the budgeting process and preparation for our 2013 guidance, which we expect to release to the market in January. We are also working on an updated technical report for the mine expansion, which we also plan to reduce in first quarter of next year.

Thank you very much for listening and now we look forward to your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Andrew Mikitchook with GMP Securities. Please go ahead.

Andrew Mikitchook – GMP Securities LP

Good morning. I just wanted, maybe, you could give us a little bit more information on this Vezza that the wording in the press release and on your call prepared comments was negligible CapEx. That would be negligible as in nothing is going on, or is it negligible net of expected revenues from bulk sampling?

Greg R. Struble

Yeah. Hi, Andrew. This is Greg. It’s going to be negligible because of the ore that’s started to come out now. So I think, in general terms, you’ve got that, plus the reduction in the overall service bill.

Andrew Mikitchook – GMP Securities LP

And that state of affairs can kind of continue, or will you continue mining or bulk sampling for an extended period of time beyond say Q4?

André Jean Douchane

Andrew, this is André. How are you this morning?

Andrew Mikitchook – GMP Securities LP

Good.

André Jean Douchane

It’s our intent that to try and bring this asset to bear here as quickly as possible. And as we continue to work on it from an operating standpoint in trying to get it to a point to where it makes a small profit, we’re already pushing ahead with finding another business opportunity for it.

Andrew Mikitchook – GMP Securities LP

Okay. And then just moving back to the Lac des Iles mine, Q4 should be – there is a lot of things that look like it could be better. You mentioned that your mining stopes in Offset. So, you’d hope for at least lower cost, if not higher production. Hopefully, there’s no more rainstorms. I guess, it’s snowing. So, you won’t have any of that any more. Just Greg, maybe if you can just generally give us a sense whether all else being equal, production should come up, and\or costs could come down for Q4 at least?

Greg R. Struble

Yeah, Andrew. As you know, we’re into our first Offset stopes. So we’re expecting some better grade results this year. But we – it’s going to be about the same. We’re thinking this is going to be pretty flat with what we’re seeing now, overall. So, there is no reason on our end to change any.

Andrew Mikitchook – GMP Securities LP

So, Q4 could look similar to Q4 at Lac des Iles, give or take?

Greg R. Struble

Q4 will look just like Q4, but it’d be similar to…

Andrew Mikitchook – GMP Securities LP

Q3.

Greg R. Struble

Yeah. It’ll be within average of the year, Andrew.

Andrew Mikitchook – GMP Securities LP

Okay. And then, just last question is for Jeff. These double smelter payments, can you just go over that once more? I didn’t scribble down what you said.

Jeffrey A. Swinoga

Yeah. No problem. So, we have a new smelter contract we put in place this year and it had shorter payment term. So, basically what we’re expecting is that we’re going to be receiving two smelter payments, when only we’ve received one in October and November. So, the terms of the smelter contracts, as you are aware, they’re confidential, but we want to highlight that fact that we estimate the net pickup or additional funds coming in from the double smelter payments will probably be about CAD25 million.

Andrew Mikitchook – GMP Securities LP

In total between the two months?

Jeffrey A. Swinoga

The additional pickup would be CAD25 million estimated.

Andrew Mikitchook – GMP Securities LP

And on an accounting basis that will be just a direct reduction of your inventories, obviously. You’re just pulling down working capital to CAD25 million?

Jeffrey A. Swinoga

Yeah, we already recognized a revenue on this, so it’s just pure cash flow coming in.

Andrew Mikitchook – GMP Securities LP

Okay. So, this is in addition – it’s not even just taking down your inventories?

Jeffrey A. Swinoga

No.

Andrew Mikitchook – GMP Securities LP

I think that I have all my questions answered, and I’ll let someone else jump in. Thank you.

Jeffrey A. Swinoga

Yeah.

André Jean Douchane

Thanks, Andrew.

Camilla Bartosiewicz

Thanks, Andrew.

Operator

Next up we have George Topping with Stifel, Nicolaus. Please go ahead.

George Topping – Stifel Nicolaus, Inc.

Hi. Hello everyone. André, just a clarification on the gold division. Did you say you were looking at other business opportunities for the mill? Is there at Sleeping Giant, or did I misunderstand that?

André Jean Douchane

I wasn’t specific, George. I just said – as we say, we’re trying to divest ourselves of the entire division. So, we’re looking at other business opportunities for it as in the entire division.

George Topping – Stifel Nicolaus, Inc.

I see. Could you update us on how that sale process is going? Previously, I think the sale was planned before year-end?

André Jean Douchane

Well, plans go as plans are made. The plan was to have something happened before year-end, and there is still a chance that it could. But you’re at the mercy of the markets, you’re at the mercy of individuals and companies that want to look at this thing and see if they can make sense to move to their house. So, as we go through that, and we still continue to have tremendous interest in it. So there’s no doubt in my mind that something will happen to it over the next while, but whether it will be by December 31 or not, I probably seriously doubt that, because we are getting into the period here between American Thanksgiving and the end of the year, which not a lot gets done, as you know.

George Topping – Stifel Nicolaus, Inc.

All right, got it. And then, Greg, just on the open pit, obviously open pit (inaudible) this quarter. Can you give us an indication of when you’re expecting the open pit to deplete its remaining reserves?

Greg R. Struble

Yeah, George. That will be available when we do our guidance for 2013.

George Topping – Stifel Nicolaus, Inc.

Even ballpark or something just – first half of the year or second half of next year, that kind of thing?

Greg R. Struble

Yeah, we’re very confident that we’ll have it for a good share of the year. I’ll leave it at that.

George Topping – Stifel Nicolaus, Inc.

All right, then looking at the underground production from the top of the Offset, what – so this is Greg for you again, if you don’t mind. What would you see as the capacity of that ramp, given the other activities with the shaft sinking and that is going on? What would you say is the amount of ore that can come up there?

Greg R. Struble

It’s not that far off of the pace that we’re going now. Remember, we’re also still mining in the upper Roby as well. We’re going through some of that work now, but I think the important point, George, is, as we have move forward in the project, we have decongested the area around there. So it’s actually a little more facilitated towards the haulage, but it is a long haul. It’s a long haul, and we’re looking at what we need for – we don’t see it as a limitation because it’s a long haul. I’ll leave it at that. How is that?

George Topping – Stifel Nicolaus, Inc.

All right. Just to be clear, the rates we’re referring to here is the third quarter production rate from underground?

Greg R. Struble

It’d be closer to our average on the year.

George Topping – Stifel Nicolaus, Inc.

Okay. Great. And then, just finally over this – just off the – so this is topical, the severance for the former CEO, can you give us an indication of how much that would be or – I take it will come in Q4?

André Jean Douchane

That contract is just part of our public disclosure. And you can just pull it up and look at it. It was partially recognized in this quarter.

George Topping – Stifel Nicolaus, Inc.

So, this was a one-off – the one-off payment was in this – this quarter as in Q4, or this quarter as in you did it straightaway in Q3? Because I think it was something like $4 million from the AIS, as I recall?

André Jean Douchane

No, it’s not. It’s not, but it’s – it was recognized in third quarter.

George Topping – Stifel Nicolaus, Inc.

Terrific. Good. Thank you. I will hand it over.

Operator

Okay, our next question comes from Benjamin Asuncion of Haywood Securities. Please go ahead.

Benjamin Asuncion – Haywood Securities, Inc.

Thanks, guys. I guess this question is for Jeff. If we were to look at the third quarter cash cost, what would be a normalized level, accounting for these sort of increased charges going forward with respect to your smelter costs and power and everything else? How would that $423 have been reflected if we didn’t have the production delays with respect to the flooding?

Jeffrey A. Swinoga

You’re getting to the indirect – and Greg highlighted this on his comments in the call -- that it’s hard to quantify the indirect, moving crews from different parts of the – Roby Zone to upper levels or lower levels – upper levels due to the flood. So when you look at the quantum of what’s possible, potentially versus what actually occurred and actual results, it’s hard to quantify. We actually haven’t come out and talked about that. But we don’t really have a good estimate. And so it’s kind of a hypothetical question. You have to look at what occurred versus what we would have planned, I guess.

André Jean Douchane

This is André. I think what’s more important here is that, Greg and his team had the flexibility to make changes quickly and keep things flowing.

Benjamin Asuncion – Haywood Securities, Inc.

I guess, I’m just trying to get a sense, so looking forward to Q3 when the hoist from the Offset Zone is completed and you’re running at around 3,500 tons per day from the underground, are we going to look at pretty consistent results to kind of what we’re looking at annualized right now until that time?

André Jean Douchane

Let us run through our next year’s budget, please.

Benjamin Asuncion – Haywood Securities, Inc.

Okay, fair enough. All my other questions are answered. Thanks guys.

Operator

Okay. Our next question comes from Mike Parkin with Bank of America Merrill Lynch. Please go ahead.

Mike Parkin – Bank of America/Merrill Lynch

Thanks, just a few questions. On the accounts receivable, will that double smelter payment lower that account in Q4?

André Jean Douchane

Yes.

Mike Parkin – Bank of America/Merrill Lynch

So does that impact the upper limit that you can draw on the $60 million credit facility, because that’s what they’re secured against, isn’t it?

Jeffrey A. Swinoga

Yeah, Mike, the bank facility is up to $60 million, and secured by accounts receivable and inventory. So, you have to look at your – you’re right, your accounts receivable will come down with the double smelters coming in. And looking at your inventory levels, there’s a certain proportion on factoring on that. So, yeah, there – it may have an impact on our bank facility, yes.

Benjamin Asuncion – Haywood Securities, Inc.

Okay. And then, after Q4, with this new agreement, are you kind of steady state, like you wouldn’t expect any further reductions in accounts receivable, but as production ramps up, you’ll actually start to see it grow again?

Jeffrey A. Swinoga

That’s exactly right. So as accounts receivable would vary with metal prices, foreign currency and production. So that’s correct.

Benjamin Asuncion – Haywood Securities, Inc.

Okay, cool. And then, you mentioned the power costs would add CAD25 to CAD30 per ounce going forward. Is that already factoring in -- like I had – I think the last time I talked to you, you were getting a CAD0.5 million a quarter credit roughly on the rebate. Is that factoring that in, or should I be taking that off that CAD25 to CAD30 ounce increase?

Jeffrey A. Swinoga

Yeah, the newer credits we’re receiving is already, of course, factored into our cash cost numbers. So this is an addition to the near credit that we’re receiving, that’s right.

Benjamin Asuncion – Haywood Securities, Inc.

Okay. And just for mid next year, you mentioned that the power rate will be determined then. Is that something that the more you draw on, the cheaper the rate you get. Like I was just kind of thinking if you guys will benefit with the shaft coming on mid-year next year, your power consumption should be ticking up. So are you – do you get a better rate the more you use, or is it like the additional incremental comes in lower cost than like your base rate?

André Jean Douchane

Power rates are – the tariffs on those are determined by a lot of factors. One of them is usage. A lot it were under this Ontario Green Energy Act, which adds a lot of money to your, mine, and everybody else’s daily or monthly ticket. It’s also peak load. It’s also something called power factor. And power factor is how much of the power that you’re drawing you’re really using, and how much is going up in heat. And with big DC motors, we can easily run a power factor by leading them with 1, which doesn’t get (inaudible) but where we get hit is peak draws.

Benjamin Asuncion – Haywood Securities, Inc.

So you’re still able to time your milling, I guess, at night. So that you keep your rate as low as possible?

André Jean Douchane

Our milling, when it starts, it runs, and it runs, and it runs for full two weeks.

Benjamin Asuncion – Haywood Securities, Inc.

Okay. All right. That’s it for me. Thanks guys.

André Jean Douchane

So, to answer your question, when they’re serving your power usage, you have a shutdown and a startup, your peak demand gets pretty high.

Operator

Okay. And next up we have Annie Zhang with Octagon Capital. Please go ahead.

Annie Zhang – Octagon Capital Corp.

Thank you. Good morning, everyone. Just a couple of quick questions. First of all, with regard to the total operating cost of CAD48 per ton of ore milled, that’s a really good number. Is it majorly because of the bigger portion of the low-grade open pit material was processed during the quarter, or there is something else involved that will lower the overall cost per ton of ore milled?

Greg R. Struble

Yeah. Hi, this is Greg. As you know, open pit costs will be less than the underground. So, you hit it right on the head. You’re right on there.

Annie Zhang – Octagon Capital Corp.

Okay. Would you be able to give us like what the difference that are we talking about in terms of mining cost?

André Jean Douchane

We don’t talk to the individual pieces because of our blended budgets.

Annie Zhang – Octagon Capital Corp.

Okay.

Greg R. Struble

And we talked about that before, so…

Annie Zhang – Octagon Capital Corp.

Just to clarify on the gold division, should we assume that if nothing happens by the end of this year, activities at the Vezza would still be on hold? There would be no bulk mining, no activities at all, minimum.

André Jean Douchane

We haven’t made that decision yet. That’s part of our budgeting process. So, as I said before, we’re trying very hard to divest ourselves of that because we just find it a distraction, and we – and if it runs into the new year before we get divested of it, we’ll have a plan to deal with it when we get through our budgeting process here.

Annie Zhang – Octagon Capital Corp.

Okay, thank you.

Operator

Okay. And next up we have George Topping with Stifel, Nicolaus. Please go ahead.

George Topping – Stifel Nicolaus, Inc.

Hello again. Just a quick follow-up. André, you’re continuing as interim CEO at the present. Could you update us on how the search for a permanent CEO is coming along?

André Jean Douchane

Good.

George Topping – Stifel Nicolaus, Inc.

When do you expect this will be finalized?

André Jean Douchane

I have no idea.

George Topping – Stifel Nicolaus, Inc.

I was just wondering what stage you’re at. Is there a shortlist of candidates or – is there no update at all?

André Jean Douchane

Yes. There’s a shortlist of candidates at this point.

George Topping – Stifel Nicolaus, Inc.

Okay. So you’re going to expect before year-end or any timeframe on this at all?

André Jean Douchane

George, we’re working on it. This is not something that I want to sit in here permanently as – so, I and the Board are working very diligently to get somebody in here to take charge of this company. And so that’s the best I can tell you. It takes as long as it takes. It’s kind of – with the new governance rules have sort of messed up my status. So, if we had to put it in a lead director, which will have to continue. But it is what it is and, as chairman, it was my duty to step in here and take back the chair until we found a suitable candidate. And we’re doing that as diligently and as quickly as we can and we’re going to the process as best we know how.

George Topping – Stifel Nicolaus, Inc.

That’s great. Thanks for the update.

Operator

Okay. (Operator Instructions) Okay, we have a question from Nathan Littlewood of Credit Suisse. Please go ahead.

Nathan Littlewood – Credit Suisse

Yeah, good morning guys, thanks for the opportunity. I just had a question for Jeff about the new smelter contract. I hear what you’re saying about the working capital release there, and that certainly looks like a big benefit. But if we look at – if we look at how your smelting and off-site costs have changed relative to the beginning of the year, it looks like they’ve roughly doubled as a percentage of your total revenue.

So, I guess, thinking about the net present value of the new contract, you’ve got a year zero or year one working capital release, which is think was CAD20 million or CAD30 million. But going forward, it looks to me like there is a net incremental cost of maybe kind of CAD5 million or CAD10 million depending on what your price tag is? Am I thinking about that the right way?

Jeffrey A. Swinoga

Yeah, Nathan, if I could shed some light on that. When you’re looking at our smelter contracts and comparing it to previous smelter contracts, you have to look at the amount of concentrates that was delivered to the smelter and the cost per ton of that. And as you can see, our grades are a little bit lower in the year and we’ve been sending more tons to the smelter. The costs have gone up in connection with that. So, it’s hard to really compare the previous contract to the new contract, unless you normalize that from year-to-year. So, our smelter costs haven’t doubled, if you respect it that way in terms of a per ton basis. But they have gone up. The total cost has gone up because of the additional concentrate tons we have delivered.

Nathan Littlewood – Credit Suisse

Okay. Good. And can we see that concentrate grade anywhere? We can’t, can we?

Jeffrey A. Swinoga

No, no. It’s something that – you could probably estimate. I mean, if you look at mass poll factors or consensus or some type of industry study, you can probably get close to some number, yeah.

Greg R. Struble

We normally don’t report that, Nathan. It’s more of an internal metric between us in the smelter, but…

André Jean Douchane

If you’re lucky, you can get an upgrade of 100 to 1?

Greg R. Struble

Yeah.

Nathan Littlewood – Credit Suisse

Okay. Thank you. The other question was about sustaining capital, Jeff. If we look at the total CapEx for LDI in the quarter, take out the expansion CapEx, you get an implied sustaining capital leftover of about CAD6 million, which is pretty high relative to the underlying operating costs. It’s about 25%, as you know. I realized that there is a big chunk of costs in there for the tails upgrade, CAD2.4 million I think it was. I was just wondering if you could add a little bit of color on, I guess, why that tails upgrade wasn’t included as a capital cost? I understand it’s being brought forward from next year. And how you determine what goes into that sustaining capital budget, because it looks to me a pretty big number, even if you take out the tails?

Jeffrey A. Swinoga

Nathan, if I could clarify that, the CAD116 million guidance and target that we’ve estimated for this year is just for the Offset Zone project. Capital over and beyond that with respect to the tailings management facility due to the floods that we’ve incurred with the additional water that went into was a necessary expenditure, and was capitalized, of course, because it has a future benefit. We do have additional CapEx for underground development that happened in the Roby Zone, as well, in the quarter.

So, I mean, these are CapEx numbers that will vary. I’m not sure, if you’d call it sustaining capital in the sense of – but these things do come up from time to time and are incurred. So, it’s hard to reflect them on a go forward basis as how much TMF would have to spend in the future, or how much underground development has to incur based on certain areas that like the Roby or other areas in the Offset in the future that may grow.

Nathan Littlewood – Credit Suisse

Sure. Okay. Well, I guess that I just think that almost by definition, sustaining capital should be relatively stable. So going forward, or in a normalized basis, how do you think about that? What sort of number would you assume for a full-year sustaining capital?

Jeffrey A. Swinoga

Nathan, we’re in a growth mode. We’re in a mine expansion phase right now. So we’re going for our budgets for next year. How you delineate sustaining capital, sustain business capital, all that type of definitions we’re looking at. And for next year, I mean – again we’re going through a budget. We’re going to give some of our guidance in January. But over the long-term, I think once everything is up and running in 2015, sustaining capital should be very low.

Nathan Littlewood – Credit Suisse

Okay, great. Thanks very much guys.

Jeffrey A. Swinoga

No problem.

Camilla Bartosiewicz

Thanks Nathan.

Camilla Bartosiewicz

Okay, operator, if there are no more questions.

Operator

We not appear to have any questions at this time.

Camilla Bartosiewicz

Thank you.

André Jean Douchane

Thank you very much for joining us today and of course, we’re always available if there’s any further questions, but thanks and have a great day.

Camilla Bartosiewicz

Thank you.

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