Osisko Mining Corp's CEO Discusses Q2 2013 Results - Earnings Call Transcript

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Osisko Mining Corp (OSKFF. PK) Q2 2013 Earnings Conference Call August 2, 2013 10:00 AM ET

Executives

Sean Roosen – President and CEO

Bryan Coates – SVP and CFO

Analyst

Leily Omoumi – Scotiabank

John Hayes – BMO Capital Markets

George Topping – Stifel Nicolaus

Dan Rollins – RBC Capital Markets

Anita Soni – Credit Suisse

Operator

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to. Osisko Mining Corporation.

2013 second quarter results conference call.

(Operator Instructions).

As a reminder, this call is recorded. Joining us on today's call are Sean Roosen, President and Chief Executive Officer of Osisko Mining Corporation; Bryan Coates, Vice President Finance and Chief Financial Officer; and Luc Lessard, Senior Vice President and Chief Operating Officer.

I'll know turn the call over to Mr. Sean Roosen. Please go ahead.

Sean Roosen

Thank you, operator. Good morning, everybody and thank you for joining us on this call. I realize everybody had a busy week so we'll try to get through fairly quickly today.

We will go through the PowerPoint presentation that's available on our website titled Q2 2013 operating and financial results for August 2013.

I'd ask you all to refer to the forward-looking statements on page two of that presentation, as we will be looking at some statements that are in nature forward looking, as we get through what's going on in the Canadian Malartic and some of the other aspects of our business.

The development rate now, as we look at Canadian Malartic – our strategy – is the development of the Canadian Malartic has continued to evolve. We've continued to develop the drill bit with the other projects and we've been delivering solid results at Canadian Malartic we will get into by starting on page four.

We've had solid report on our safety record this year, which is really an outstanding accomplishment by our team. We continue to be an industry leader, as we develop Canadian Malartic and continue to train our workforce to work safely and to deliver on our commitments to our people.

Construction of the project, as most of you are aware, was achieved from first drill hole to commercial in six years and we've – we're coming up on the achieve of the of the nameplate capacity in Q2. We're at 52,900 tons a day on operating day basis and our calendar day basis just under 49,000 tons a day. Daily through put of 69,160 tons was achieved May 31st, 2013, with cash costs coming in for this Q2 of CAD781 an ounce.

We've also continued to look at our – waste optimize initiatives in terms of cost control and benefits and we have cash flow of CAD63.7 million in the quarter and mine free cash flow of CAD25.3 million.

Canadian Malartic is achieving its standing as a world class mine and we believe it will continue to be one of the top operations in the states worldwide, as we complete the ramp up. And look forward to the second half of the year, where we should achieve our guidance, as laid out to go to 485 to 510,000 ounces for the year 2013.

Over to page five, the operating cash flow CAD55.9 million brings us to CAD118.4 million for the year to date. The free cash flow of CAD15.1 million for CAD422.3 million year to date, which is from what we've seen on results on the space so far pretty good indicator and maybe speaks to the point that Osisko, the asset base, is pretty flexible and we have control assets and we don't have cash calls or other spending outside of the mines, so we do have the flexibility to control how we spend our money and when we spend our money, which I think has been demonstrated in this quarter, as we have taken on some capital constraints.

Earnings from Canadian Malartic at CAD42.6 million adjusted for neat earnings of CAD25.2 or CAD0.06 a share. We also took impairment for Hammond Reef project, which net of taxes left us an impairment of CAD492.8 million or CAD1.13 per share.

The CAD501 million devaluation net of taxes was related to most to the exploration and development project of Hammond Reef, which we've taken a full right down on this quarter to reflect the new reality of the gold prices and the cost of mine building that we are seeing in the current world. And we will come back to that project as we see things evolve in the space, in terms of both mind building costs and as well as gold price.

Probably one of the most significant things that was achieved in the quarter was the rescheduling of CAD225 million of debt, which we will get into later. But obviously this frees up some liquidity in our balance sheet and gives us the ability to manage our business in these turbulent markets and I think it speaks well to the quality of the lenders that we have been able to work with, and we wanted to thank our lenders for working with us hard to achieve this rescheduling of the debt payments at Osisko.

Over to page six, the operating highlights. We did produce 111,701] ounces for the quarter, and the record month in June of over 45,000 ounces, which we hope to continue on in that rhythm, as we see the second half of the year and access to the north pit areas that we have been working on so hard to provide higher grade to compliment the higher throughput that we achieved, we see meeting our guidance on the year meeting those achievements.

The grade for the quarter at (0.28) grams, 0.03 grams, which I remind is less than (three hundred parts per billion) less than the scheduled grade, so very precise measurement that we are trying to achieve here but we are definitely achieving our goals in terms of grade reconciliation and total contain ounces reconciliation since the beginning of the project. We continue to perform pretty much online with the model that we presented in the feasibility study, so both grade reconciliation and total contained ounces remain on track.

Recovery for the quarter 89.7%, which is somewhat higher than our expectations. We hope that this continues on. But, you know – and we had 84.9% recovery in our original feasibility work so we continue to see benefits from slightly higher recovery as we evolve in the mill, and that's a complement to our team in Malartic, who has that has worked to manage the milling operations and do the updates and upgrades that we have done.

So, I think there is a big evolution on the mill-operating standpoint. And just to remind everybody we installed two significant cone crushers last year and we commissioned the pebble crusher in January of this year, so this Q2 was the first real quarter, where we ran the whole quarter with the new crushing components completely in the mill and we saw that reflected in the increased throughputs as we go through.

We did have down time, both due to weather and some of the storms that we had this year that prevented us from operating in the pits. So, there is some down time that we did see there. It was a fairly turbulent spring from a weather standpoint and also we were affected by some of the noise mitigation processes that we executed during the spring and summer. And we also – we've seen those reflected but hopefully the second half of the year. We should be able to get a little bit better at some of those processes and achieving more availability, both the pit operations and the mill.

Over to page seven, you can see the steady March forward, as we evolve the production of the gold – 111,000 ounces at best quarter to date. We've seen cash costs continue coming down. We've achieved CAD781 of cash costs that we put in the month of June. We saw that cash cost as obviously we increased the grade a bit. We saw our cash costs coming down to CAD600 an ounce for that month. So, we feel things are moving in the right direction, as we achieved throughput and accessed the higher grades to the north.

Over to page eight, the evolution here, guidance is on track and unchanged 485,000 to 510,000 ounces for the year. Our goal is to achieve 50,000 tons a day average for the first half of the year and then 53 to 55,000 the second half of the year and having a nice grade of about 1 gram, which we believe we are on track to achieve. So that obviously means that we will be running second higher grades from second half of the year to having about times grade at in and around the 1-gram level.

We have predicted recoveries about 87% and we continue to see slightly better than that, so hopefully, that will continue on, as we evolve in the second half of the year.

Page nine, a little bit of the work that has been on going on the optimization program, regarding the increased throughput, as we work toward the 55,000 tons a day with the added crushing capacity. Brought some more optimization programs going on, in terms of – have grind and medium optimization within the mills, material handling systems, availabilities, stockpile managements and also some of the alterations that have been made in the material handling system in terms of bins and conveyor. We continue to have evolution on that front and we've seen good progress and we believe that there is quite a bit left to go, as we settle into the Q3 operating session and on into Q4.

Improving mining activities, obviously we have discussed in the past about the access to the north pit area, which for 2012 we said we were probably about seven to eight months behind on the evolution of that area.

We are catching up. We have not completely caught up in the development of the north pit wall but we are definitely making progress. And hopefully by the end of the year or early next year we should be back to where we hoped to be on that north pit wall, which allows us a bigger surface to work with, more availability and also increase the optimization of the fleet as there is less movement of the mining tools, especially loading equipment out on the pit, when we're blasting and if we have a larger area.

So we will see the increase efficiencies as the pit floor expands. We have access in and around the old mine working for the plumbing of the deposit has done a better job of creating a larger area of higher-grade material that we need access to.

We've also have been working on the equipment viabilities, which we are aware – working to continue that. We're a little bit behind, where we would like to be, in terms of availability and utilization but we believe by the end of the year we should see better production and utilization on that.

The overall mine working areas, as we discussed, pit operations and the expansion of the north pit wall are key to that. Evolution of ramp and dump walls and some of the structure required for roads and access continues to optimize and we get those areas done to mining at the Gouldie zones and some of the other satellite pits that we need to achieve till our hopes to do that is underway and hopefully we'll conclude most of that work by the end of the year, early next year.

In terms of reduction of costs, we have reduced the presence of contractor fleets on site. We've improved the utilization of our own materials. We're working with suppliers as well to reduce down time for deliveries and also to have availability of equipment and to have some better costing on some of the input costs and we hope that as we see the evolution of the market continue on the supply side that we'll see some cost reduction and flexibility from the supply chain coming toward the bottom line at Canadian Malartic.

Procurement logistics is continuing to improve and we're seeing a little bit better as things cool down a bit in that space. Several initiatives are contributing to the overall effectiveness of that. And we expect to see, with the evolution of our company and, you know some of the transitional areas within our group, as we get more settled in, that we will be able to manage that aspect of our business more efficiently.

Over to page ten, achieving a nameplate capacity, you can see the evolution here. The added crushing capacity that we referred to already is coming to bear and with the optimization of grinding medium and the adjustments that are required to compensate for the new pieces of equipment as we – every time we change one piece of equipment we have to adjust everything in the back end, so those optimizations are under way and we continue to be quite (Technical Difficulty) with the way things are going there.

Even though we did suffer quite a bit of delay with the commissioning of the two cone crushers last year and early this year, we seem to have crossed the bridge on the majority of those issues. And then the crushers are performing much better than they were and we see where steel and down time for that reaching its optimization point probably in Q3 and Q4, which will help us on our overall ability of the mining circuit and the combination circuit – so in milling circuit and combination circuit.

Page 11, the evolution of mining; we've seen steady progress throughout the year, in terms of the evolution of the pit. We are looking to increase our tonnage on a per day basis. We average 171,000 tons for Q2 and we hope to see that improve for Q2, as we get into second half of the year.

Typically speaking, springtime in late winter and spring break up and early summer can give us a little more down time, both in terms of storm management where we have to evacuate the pit during lightning storms and also, when we are doing noise management, we have to be cognizant of the southern winds from the south that do put pressure on our operations from a noise standpoint.

So, 15.7 million tons moved in an average of 172,000 days. Throughput ratio is about 2.78 and we will see that come down as we push further into the north zone. And blasting of crown pillars, which were significant challenges to overcome, as we do in the north pit wall, we have two more left this year but we certainly feel that the operations have gotten better and the team made a lot of efforts to get control of those operations and some of the stemming and blasting operations have been carried out really had a big effect on our ability to execute the work.

In May, we had a few delays due to wind conditions, so as we in the note here 50% of the blast during the month of May were delayed or canceled. So that we had to catch up on that in June and we see the access to higher grade ore, as we evolve through June. And then just for July, we continued to have access to more and more of the high-grade ore, which is demonstrated on page 12.

If you look at the damages on page 12, the red areas that represent the 1 gram cut off, which essentially means that the head grade in those red areas would be about 1.8 grams and it's the – area of the pit at the top of the page contains the higher grade zones which are on the northern pit area, which is under development as we speak.

You can see some of it on the photo image on the bottom right hand corner. As you can see the north, pit wall is the portion that is closer to the town of Malartic as well. And as you can see on the image on the bottom left, the sequencing, the southern portion of the pit is several benches lower than the northern portion. So what we are trying to achieve is coming down the northern side to get it in sync with the southern portion of the pit.

A better image of that is demonstrated on page 13, where we essentially were looking from east to west and the north pit wall area is on the right side of the imagery.

As you can see, we're five benches above the southern portion of the pit. So that is work for the second half of the year to try to pull that northern pit area down and expand the footprint within the pit, which will result in more utilization and optimization of all the mining fleet and now allow us access to the higher grade areas, since are mostly contained in the north area.

Page 14, the lower mining fleet ability and utilization factors that we discussed; we are hoping to see the utilization go over 70%. The availability is running about 83% for production trucks, slightly lower for loaders, which is an aspect – the wheel loaders, loaders that we have commissioned are getting much better availability. We're suffering on the Caterpillar 994 but hopefully we will get forward progress on that.

Shovels have been running around 74%, 75% and we're going to hope to see that move up to around 80%, as we get really less complicated mining areas due to the old mining works. We should be able to get that – those numbers to come up a bit and production trucks and they have been affected somewhat by weather.

We were down 5.9% of the time, due to noise and weather. So hopefully the rest of the summer and into the fall we will see that number reduced which should help us on the production trucks as well. So, that is one of the key issues we are focusing on for Q3 and Q4 is to get that mining availability numbers to increase.

Page 15, a review of costs. We're about 19.52 a ton with (215) for G&A, (876) for milling and (861) for mining.

The costs are going in the right direction, mostly affected by throughput and also the evolution of the pit mining of the north pit wall using fly rock prevention systems and then blast mats, and smaller blast hole is keeping the costs in that north pit wall up a bit.

So as we see those areas evolve another three or four benches down, we should see our mining costs come down and hopefully we'll see the milling costs come down, as we see more throughput at the mills.

So, that's more of an evolutionary process at this point in time with about half of what we expect to see in cost reduction related to the linear effect of higher throughput.

Capital discipline has been the subject for the quarter obviously. We came forward for the reduction of CAD80 million for Q3. I'm onto page 16 now. The original budget of CAD220 million has been reduced to CAD138 million. We are continuing on that budget rate now.

Capital allocation focused on the development in access to the Barnat zone with the high 177 deviation and final engineering process for review and hopefully are going to perform earning process for both hearings in 2014.

Exploration is continuing on at the Kirkland Lake. We have quite a bit of exploration, in terms of pent-up resource updates to announce hopefully into the fall as we receive that work back and we are constrained our drilling operations at this point in time and more surface work and finishing up compilation and we will come back and look at where we are in the fall, October, November to see where we go with that.

The evolution at the upper Beaver including the satellite deposits in the camp to look at combined operating scenario in that area and the optimization of that project will be. As you recall, we've suspended without taking operations after having set the caller at the upper beaver project, so we'll see where we get to in Q4 and we don't plan to make any more decisions on that project until Q4 at this point in time, while we wait for the rest of the data to be calculated and get the resource updates.

Ongoing work in the drill area in Mexico, we are waiting for drill and water use permits in that area. We'll hopefully start drilling again in early fall.

Those targets have continued to strengthen and we're very impressed with what we're seeing from two dimensional standpoint but we have not done enough drilling on the main targets to have a third dimension at this point in time, so that will be Q3-Q4 event, as we push to the end of the year.

We have about CAD2.5 million left to spend in our budget for that project, the bulk of which will be at the end of Q3 and Q4, so more news to come and I hope in fall.

The review of all of our use of dollars have been – continuing to be for the Q2 operations and we continue to do that through the summer. So, we will be taking a very good conservative approach to capital allocation as we go through the summer and see the evolution of the market conditions and where we get to on our cost reduction programs in house as well.

A little more detail on that aspect of our business is on page 17. I won't go into it in too much detail right now. But Canadian Malartic, we have a budget of CAD80 million of which we spent CAD51 million so far.

Hammond Reef – we're winding up on the revised programs there to put that project – close up the EIA and see what happens there. We spent CAD17.2 million at the upper Beaver project to date. Full budget was CAD18 million and exploration was budgeted at CAD31 million of which we've spent just under CAD20 million so far. So we're pretty much on budget with where we thought we would be with the programs and we'll continue to evolve that, as we get further in the year.

Page 18, the increased flexibility within the balance sheet; I think it's important to note the quality of the lenders that we have on this project like Canada finch plan, CCIB has been a primary lender since the beginning of the project, a CAD150 million note with us, which has been rescheduled for final payment included in 2017. And also we have a note with kiss depot for CAD37.5 million and resource came back for CAD37.5million and Caterpillar finance, which has the financing on the mining fleet and MTSQ, and maybe Ryan, if you want to – Bryan, if you want to go through the details on the rescheduling.

Bryan Coates

Sure. Thanks, Sean. So, one of the things that we had talked to you about is gaining flexibility. There were a lot of concerns over our balance sheet and our commitments on debt reimbursement and particularly in (wall town) global markets.

We had indicated to you that we were working on gaining more flexibility and we're pleased to announce that earlier this week that we had reached an agreement. And the agreement basically allows us to reschedule some of the payments that we had.

Initially, you will recall that we should have had over – the two instruments, the CAD150 million loan from CCPIB and CAD75 million convertible debenches were coming due prior to November of next year. So, we've been able to rescheduled that.

And you can see on page 19 what our debt reimbursement schedules look like – so, we have reduced this year's commitment by over CAD17 million next year's commitment close to CAD180 million. So that gives us flexibility, as we go forward and I think is again attributable to the lenders and financial partners have in us.

As part of the refinancing, we've been able to reduce the interest rate from 7.5% to 6.875%. You will recall this debt was the debenture and original loan were negotiated in 2009. An as part of the conditions that we had, we've gained some flexibility and it will be finalized as we get the final documentation with respect to capital returns to our shareholders.

Obviously when you have debt there is certain constraints on what you can do with respect to dividend programs, capital share buy backs, et cetera. We've negotiated flexibility in that.

So, as we go forward, I think we've gone a good sound financial position that matches our ability to generate cash flows from Canadian Malartic. And you can see on page 20, our financial position with respect to our company – and we ended up the quarter with CAD194 million in cash. Included in that cash is (46) – we're now in early July. We paid the paid the deposit for closure costs so we've got roughly CAD46 million tied up on guarantees with the Quebec government for the closure cost that will only be incurred 15, 16 years from now.

So, we are looking at getting some facility. And this is part of the renegotiation that we had with the financial partners with the ability to put in a line of credit so that would free up another CAD150 million in line of cash. So that's what we are trying to achieve. I think we laid that out to you in the last conference call and we are trying to deliver that. Sean?

Sean Roosen

Yes. I'd like to say thank you to Bryan and his team. They have worked hard with the lenders and the lenders worked hard to get the deal done in trying the gold markets. I think it sets the stage for the second half of the year. We've done a lot of work in the first half of the year to set the stage for a clean burn in the second half of the year.

On to page 21, the income statement and in the year with revenues of CAD159 million for the quarter, we based that gold cost – gold sales of around CAD1,390 an ounce average for the quarter, mining operating cost at CAD90 million for the quarter, royalties CAD2.27 million and depreciation CAD23.6 million, earnings from mining operations CAD42 million for the quarter, G&A is CAD5.8 million at this point in time, exploration evaluation just under CAD 16 million for the quarter. Now we see the big number for this quarter is the impairment charge of CAD530 million, including the exploration outside of Hammond Reef that was also in that net impairment charge.

The earnings for the year. At this point in time, were negative CAD524 million with that I am payment with and income and mining tax expenses CAD31 million for about CAD1.13 per share.

Regarding the Hammond Reef impairment, we've taken a look at similar projects that are in the space and the capital costs are we haven't seen a significant reduction.

In big mining construction at this point in time – so we have assumed about CAD1.5 billion to CAD1.8 billion would be the cost to build roughly a 60,000-ton a day operation there.

With production costs at the rates, we have their relatively low strip ratio about CAD800, CAD850 an ounce so we felt it prudent on the advice of our auditors – we've taken impairment for 100% of the investment in the project. This is however, a very large deposit located in Ontario that is well advanced in the permitting process.

So, if we do see a reevaluation in the space and reduction of mine building costs, this is an asset that could be – provide good leverage to us in the future upside.

Current plan rate now is to conclude the permitting process that I personally that has been engaged and keep the option value of the project in our back pocket for a stronger market and the planned building costs.

On to page 23, the adjusted earnings on a per share basis. Bryan, do you want to...

Bryan Coates

Sure, I mean we've – basically, what we've done is we stripped out the unusual items that we had during the quarter being the major impairment charge on Hammond Reef, as well as some of the right down of the exploration projects including (inaudible) and a number of other projects.

So what we see is the adjusted earnings would be roughly CAD25 million, roughly CAD0.06 a share and that compares to the CAD35 million that we have on a comparative basis in the previous corresponding period last year.

I think one of the things we really want to highlight to you for this quarter was the operating cash flows that were generated from Canadian Malartic and that really puts us in a good position.

You know, we've have been saying to you, Canadian Malartic is a mine that once we get the full rhythm going, proper execution, nameplate capacity, it will become a cash generating machine. And again, I think this quarter we continue to demonstrate that.

And you see, if you go to page 25, we've just given you some – based on some of the results of that come up to date, you can see that for operation our size, a company our size, we are generating the cash and pleased generating free cash flow and we are focused on insuring that that trend continues. Sean?

Sean Roosen

Yes. Page 25 speaks to the point about the flexibility in the asset base and our ability to stop and go as required. But you own the assets 100%. We have no financial schedule that we have to commit to and no cash calls from joint venture partners that we're obligated to participate in.

So we have the ability to manage in these times of troubled markets and to exercise fairly – a fairly abrupt capital changes. And then we see that reflected in this quarter and will be as we get into the second half of the year.

Over to page 26, we've made some very big strides in our sustainability section. The new moderating committee that was part of the commitment during the public hearing process is up and running and we established an improved relationship with that and we're happy with the evolution of that committee and the cooperation with the community and stakeholders in the area.

The operating parameters at Canadian Malartic that were modified during the session last year, we are fully implementing those and respecting those and we continue to evolve in the pit wall.

And as we said on many occasions, depth is our friend. As the operations are fairly complex, while we're still using fly rock mitigation, blasting that stemming and casings and drilling and placement. For blasting operations and as we get deeper on the north pit wall, we will continue to get better at the management of those aspects of our business.

The other thing, of course, was – we are the first company I believe in Quebec to deposit 100% of our reclamation fee. So again, we are an industry leader in that space and we think that that's a strong message for our continued mining and we it shows that we do respect our commitments as we get into the projects.

The 2012 sustainability report is available on the company's website. And please have a look at it and we would value any comments back from shareholders and other stakeholders.

Our relative valuation slide on page 27, it seems that we are trading about 0.6 times NAV. We believe that several things have happened in Q2 and Q1 to derisk the project; we see constant evolution.

This has been our best operating quarter to date, and we see a lot of things that have changed. And we're switching from third gear to fourth gear on our operating side so hopefully we'll see better valuation of the project and also we think that the debt reschedule and the balance sheet will hopefully provide some confidence to shareholders that may not have been a participant due to that issue that we have now addressed that issue and it's behind us so we see the ability to be a stronger participant in the evaluation process.

Also on cash flow basis, trading 7.5 times cash flow, which I think makes the argument given where we are on the project and the number of risks that have mitigated or reduced that we hopefully will move up the food chain, in terms of what kind of valuations on the cash flow multiple.

So that's pretty the evolution of what happened in Q2. There's a bit of a recap on page 28. I won't go into it in too much detail but I think it's a compliment to the operating time what they have achieved this year, given the issues that came at us in 2012 and 2013. I'm very pleased and want to thank the team for their efforts.

It's been a long, hard session and I think the hard work has paid off and we see the second half of the year looking good for us, as we come through the commissioning process and we settle into our rhythm on the exploitation of the Canadian Malartic project.

We're well positioned to take advantage of these times, our cash costs and our balance sheets are some of the best at this point in time and we're going to continue on with that opt process – optimization process throughout the rest of the year and we will cautious capital deployment as we go through this as well.

The upside, we have both the Kirkland Lake camp projects that we own 100% in the grill, so there is low cost, high-impact assets that are evolving, even under capital constraints to provide upside and leverage to the gold price.

So we are happy with the asset base is and where the evolution of the operations are. And at this point in time, I think we will open it up for questions. We've been at it about 35 minutes here. So I think we have time for probably 10 or 15 questions today, those who have the patience.

Question-and-Answer Session

Operator

Thank you. One moment please. (Operator Instructions).

Our first question is coming from the line of Leily Omoumi with Scotiabank. Please proceed with your question.

Leily Omoumi – Scotiabank

Thank you, good morning, guys. Just a quick question on the capitalized stripping costs. I know for Q2 it seems like it was about CAD95 per ounce and I recall the guidance that was provided in Q1 called about CAD50 per ounce.

What should we look for the second half of the year for the cost, given that it's not included in the guidance?

Bryan Coates

We'd probably look at about CAD35 to CAD50 per ounce.

Leily Omoumi – Scotiabank

Okay. So, it's going to come down significantly?

Bryan Coates

Exactly. Significant amount of work that we have done in opening up areas won't be done in the future. And, so, that's where we see it today really.

Leily Omoumi – Scotiabank

Okay. And does that mainly relate to what you have done on the north end of the pit? Can you expand on that a little bit?

Sean Roosen

Certainly, the evolution of the crown filler blasting and the amount of work that we had to do using blasting mats and fly rock mitigation was a primary driver in the first half of the year for the costs and stripping costs being high in those areas.

But as we get through the crown fillers, which we have a couple left but the majority of the higher stress ones are done. So, we should see those costs start to come down to normal mining costs, as we get deeper.

Leily Omoumi – Scotiabank

Okay, great. Just one more question. Obviously, May seemed to be a good month in terms of throughput at (53,138). Was that per operating day or calendar day?

Sean Roosen

That was operating days.

Leily Omoumi – Scotiabank

Okay.

Sean Roosen

And we didn't have a lot of down time in May, though.

Leily Omoumi – Scotiabank

So I guess – would it be fair to say that, I guess, April really brought the average for the quarter down because of some of the issues that you referred to earlier on the call?

Sean Roosen

Yes. April was a rough month from a weather standpoint and operating standpoint with spring break thrown in for good measure.

Leily Omoumi – Scotiabank

Okay. I'm sorry. What were some of the operating challenges that you faced in April?

Sean Roosen

While we had a shut down there in April...

(CROSSTALKING)

Leily Omoumi – Scotiabank

How long was it?

Sean Roosen

It was five and a half days.

Leily Omoumi – Scotiabank

Okay.

Sean Roosen

And it was one other day, full day of accumulated over a couple of other shut downs but we also had several issues with spring runoff and a couple of storms that forced us to move back. And we had a significant amount of blasts that were delayed due to winds from the south.

Leily Omoumi – Scotiabank

That's it for me. Thank you, guys.

Operator

Thank you. Our next question coming from the line of Dan Rollins with RBC Capital Markets. Please proceed with your question.

Dan Rollins – RBC Capital Markets

Thanks, very much. Congratulations, gentlemen on a nice good quarter. You are in line with guidance.

Going forward, just looking at the recoveries, I guess the design was just under 86%. You've been well above that. Have you guys been able to do my more test work to come up with a new-targeted recovery?

Sean Roosen

I think, you know, until we are at steady state in the 50, 55,000 tons a day we won't go down that road. It is what it is. Obviously, there's optimization.

Most of it has to do with grind size into the CIP circuit. So, until we stabilize in those throughput areas, we will maintain the existing recovery group.

Dan Rollins – RBC Capital Markets

Okay. Perfect. And then just on the (inaudible). Excluding what you would – I guess capital strip going forward. Is CAD100 million, CAD120 million next year and the year after a good number for the capital budget at Malartic just due to the amount of money you have to spend on developing Barnat? Or is that high and we would see that farther out now?

Sean Roosen

It's going to vary a bit depending when we do the Barnat deviation. So, we're not going to go down the road on capital commitment so we finished the engineering on that project right now. The normal sustaining project is about CAD55 million a year, and then evolution of Barnat and how fast we can do that will dictate where we get to. We will probably have more information as we get further into the year, Dan.

Dan Rollins – RBC Capital Markets

Perfect. And then, just maybe a little bit of guidance on your unit money costs going forward. I know you are blasting around the crown pillars so unit cost is higher.

But when do you expect – how much benches do you need to be done to run on the lower sustaining mining costs, say 250?

Sean Roosen

We'll we've got a differential of about five benches between the south pit and the north pit.

Dan Rollins – RBC Capital Markets

Yes.

Sean Roosen

We'd like to see the north pit down another three, four benches then we will see significant cost savings as we get down there.

Right now, we are prudent in terms of fly rock mitigation stemming and the way we are loading and using 5 1/2 inch blasts in a lot of those areas, slightly higher density as well.

So it is evolution near but most of the efficiencies will come in when we are down another (3% to 4% off that wall), which is surfaces at 310 meter elevation and then we really start to hit the gas pedal at about 240 meters, so there's a bit plan for there – of about 70 meters. It seemed to be optimal.

Dan Rollins – RBC Capital Markets

Okay. I guess excluding down time with respect to wind and noise and dust, what is sort of the per dollar per ton differential between where you are blasting in the north wall and five benches down, CAD0.25 a ton? Did you say CAD0.50 a ton?

Sean Roosen

No. It was add. It can be – like with the smaller blaster and the blast mask, it can be – are about 20 ton, but 20 ton more.

Dan Rollins – RBC Capital Markets

Yes.

Sean Roosen

So we own around the (225) a ton the normal bench, and then we can be north around (three and a quarter) in the upper benches.

Dan Rollins – RBC Capital Markets

Okay. So it can ebb and flow over the next couple of years, specifically if want to you move to Barnat, we'll see the cost go higher but then we'll start to see them come done with a great – we've got a great life there.

Sean Roosen

Yes. We're interested to get in the Barnat. The rock is significantly softer due to the impact of the structural geology in the area, so we’ll see what the powder factor and blasting pattern is like when we get there. But in those near surface areas, we do take maximum protection.

Dan Rollins – RBC Capital Markets

Great. Congrats. And you're setting up nice and through. Good second half.

Sean Roosen

Thanks, Dan.

Operator

Thank you. Our next question is from the line of George Topping from Stifel. Please proceed with question.

George Topping – Stifel Nicolaus

Good. Thank you. Hey, Sean, can you give us an indication of how July went, in terms of the production?

Sean Roosen

Well, it's certainly – we're accessing the north pit wall on a much more aggressive basis, we're seeing a good evolution and we're on track to meet the guidance from what we see in July. It's been a good month and we continue to be very happy with the evolution of that.

We've got a couple of other significantly technical blasts in July, so a lot of the things that were impacting us were achieved in July.

I won't go into specific numbers today but we're working on meeting guidance for the year right now, George, and we see that being a doable deal right now.

George Topping – Stifel Nicolaus

Okay. Good. The, Bryan, on the administration that was – came down quite a bit overly from the previous quarters, do you see the (inaudible) and G&A settling out?

Bryan Coates

Basically if the rate where we've got the spend for this quarter, George.

George Topping – Stifel Nicolaus

Okay. And then also from the income statement, the exploration and valuation jump looks like noncash item in there. Is that – could you break that out for us?

Bryan Coates

Exactly. No, that relates, George, to writing down a number of projects that we've had (inaudible), we've had from Canadian projects that were ongoing. We had some projects in the U.S. that we backed away due to unfavorable results.

So it's a number of projects, a big one – it's CAD13 million noncash that we had and the big one would have been (inaudible).

George Topping – Stifel Nicolaus

Got it. Good. Thank you.

Bryan Coates

Thanks, George.

Operator

Thank you. Your next question is from the line of John Hayes with BMO Capital Markets. Please proceed with your question.

John Hayes – BMO Capital Markets.

Thank you. Good morning, gentlemen. I just have a simple question. The next two quarters – I know you're guiding towards around the gram. I just wondered what the grade is going to be? What's your best understanding of the grade, in terms of grams per ton in the next two quarters?

Sean Roosen

We should be north of 1 gram and somewhere between – it will very up – it will bounce up and down between 1.1 and 1.2 on the high end but we should homogenize that around the 1 gram at the end of the year.

We are seeing some zones in there that are north of 1.2 that will contribute significantly to it, as we get around the crown pillars and the round (yules).

So, but the homogenize grade for the second half of the year will be between 1 and 1.2.

John Hayes – BMO Capital Markets.

Between 1 and 1.2 for the second half of the year?

Sean Roosen

Yes.

John Hayes – BMO Capital Markets.

Thanks. Okay.

Sean Roosen

That was when the year comes up around the 1-gram mark.

John Hayes – BMO Capital Markets.

Right. For the year, it works out to 1 gram.

And the second question I have, on the grind size that is giving you this extra recovery – I remember at one point you were down to 40 microns. Is it – are you – is the grind size below that now? Or...

Sean Roosen

No, we're grinding actually coarser than that right now. We're running around 65 microns and we're still seeing some fairly good recovery.

So, we're pretty much on the throughput design for that recovery area right now. We run the mill on several occasions over 55,000 tons a day for several days in a row, so we have seen the recovery at 65 microns hang in there.

We don't know if there's some zoning through deposits so that's why we saved the biggest historic recovery curve.

But as we get more of the bit through and by the end of this year, we maybe have better feel for it as we get contribution from – essentially divided the deposit into four quadrants from the recovery curve with these contribution from two of the quadrants thus far, which is why remained on our recovery curve today.

John Hayes – BMO Capital Markets.

Okay. And one final question. Bill throughput, let's say there's items that are dropping out of the schedule that are helping your throughput availability to go up. So, I just wondered, how you see your availability changing in the mill over the next two quarters?

Sean Roosen

You see for this quarter, we ran the 93% availability. Previous quarter was 93%, my feasibility was 92%.

We're pretty much on the availability of the mill numbers that we hoped for. We will see some evolution, as we continue to open do an optimized material handling systems.

The bulk of it really starts in the pit when we get good breakage in the pit. We have less hang-ups and we have less maintenance to deal and we get a better wear on our steel. So really, it's driven by what comes out of the pit.

At this point in time any achievements were receive in availability will be basically driven by what kind of quality is in the back of the truck.

John Hayes – BMO Capital Markets.

Perfect. Okay. Thanks very much.

Sean Roosen

Thanks, John.

Operator

(Operator Instructions). Our next question coming from Anita Soni with Credit Suisse. Proceed with the question.

Anita Soni – Credit Suisse

Good morning, guys. Congratulations on a good result.

My first question is with regards to accounting for the mining costs as they come through into the mill. Is that the blasted ore around the upper benches of the crown pillars are right now has not been – has not hit the mill yet? And is that going through your earning statement yet?

Sean Roosen

Well, everything that we are blasting in the pit, we priority load to the mill from those areas. So, throughout the normal mining evolution we have consumed anything in our path here.

In terms of accounting for it, there was some of the crown pillars that we had backfilled underneath that we've originally didn't have in our mine plant that went to the mill as well but not a significant change in what was originally scheduled.

Anita Soni – Credit Suisse

Okay. Then, so, as we get to that – I think it's CAD2.76 that – the mining costs, correct me if I'm wrong – but the CAD2.78 mining cost per ton – that represents the blend of the CAD2.25 a ton in the lower benches and the sort of a CAD1 a ton more in the upper benches?

Sean Roosen

That's correct. Yes. Anytime, we're using 5 1/2 inch blast hole or blast mats or apply rock mitigation, HTML lining and subsequently we put casing on top but it does pick up the cost per ton in the CAD3 range. So that's a much higher cost at CAD2.76

Anita Soni – Credit Suisse

Alright. And then as we get into the second half of the year, how would that relative blend between the two play out. Do you know?

Sean Roosen

There's evolution on the upper pits. So I would say right now we will see some reduction in costs but not much off where we are right now for the near term.

Anita Soni – Credit Suisse

Okay. Thank you for the tonnage information on the stockpiles. Can you – or on the stockpiles – can you just give me the grade of the stockpile right now?

Sean Roosen

We're running about 0.5 to 0.6 grams in the stockpile and it's about 2.5 million tons in the stockpile. It's relatively stable in the stockpiles throughout the process and we're trying to maintain stockpiling in that window and hopefully sometime in the next year that we will see better increase in the lower grade stockpile but right now, current strip ratios and mining rate, we're happy where we are.

Anita Soni – Credit Suisse

Is that stockpile at 0.5 to 0.6 is the 0.6? Is that economic currently or risk of that having to be reevaluated at year-end?

Sean Roosen

No, I think in our cash operation, it's already paid for anyway that you won't have to capitalize the strip ratio even if you didn't so it's paid for.

Anita Soni – Credit Suisse

Okay.

Sean Roosen

So, I don't see any reason why we would impair that.

Anita Soni – Credit Suisse

All right. And then last question, what is – can you remind me what the regular maintenance schedule is on the mill?

Sean Roosen

We'll be looking for another shut down in this quarter in the month of August and it's – where shut downs are running five to six days normally and we probably have – we scheduled four shuts downs a year. We'll see how it goes this year but we would see the next shut down happening in December at this point in time.

We are getting much better wear out of the steel as we stabilize operations and we are getting better throughput and also with the better muck coming out of the regularized blasting in the pit, things are becoming much more stable.

Anita Soni – Credit Suisse

Okay. So, without continuing stabilization sort of running around five to six days a quarter standard? Or?

Sean Roosen

That would be – yeah, it's not a bad number to work with at this point in time. I'm not sure it will always be on the quarter because it's a – if we can get 100 days out of the steel, we'll take it.

Anita Soni – Credit Suisse

Alright. Okay. Thank you very much.

Operator

Thank you. Your next question comes from the line of (John Tumasos with Very Independent Research). Please proceed with your question.

Unidentified Speaker

Good morning. You said in your impairment discussion, the Hammond Reef capital estimate was (one five to one eight).

In order to achieve April satisfy return, say, 15%, what gold price would you need to build the mine? Would it be under (2,000), over (2,000) roughly?

Sean Roosen

I think it's definitely doable at under (2,000), John. I don't think today I will forecast on those projects. I mean there is appending feasibility study that will probably do it at some point in time. But right now on capital constraints, we decided to conclude with the permitting process and wait and see there.

The CAD1.5 billion to CAD1.8 billion that we are talking about is essentially looking at other feasibility studies put out recently and along with the present valuation of what it costs to build Malartic in 2011 and 2010 as opposed to what we see cross set today.

And we see that in the capital costs, being a primary driver on that, operating costs on that project we look about (800 to 850), so that's fine. For an open pit, that' not a bad number in this day and age. What we're going to need is a reduction in capital expenditures.

And we are hoping to see basically a combination of both thing, John, an increase in gold prices in the longer term, as well as reduction in capital costs for mine building.

As we see over CAD200 million worth of projects that have been delayed or canceled that, we hopefully see reduction in the construction of the larger projects.

Unidentified Speaker

Thank you.

Operator

Thank you. Our next question is coming from the line of (Mike Parkin with Dejavi Securities). Please proceed with your question.

Unidentified Speaker

Alright, guys. I see the milling cost is consistent for the first half. With the minor changes, you're doing in the mill, should we expect that to pick up a bit? Or do you expect that to remain relatively around the (875) range?

Sean Roosen

Yes. I think we are happy with where it is right now. Obviously, there is a linear relationship at the mill more so than the mining operations when it comes to throughput.

There's certain amount of mill is fixed costs so any throughput we get will affect on a positive basis – our unit costs but we are happy with where the mill is running right now and what we are envisioning in terms of modification, optimization to Peter systems and conveyor belts and just the way we arbitrarily handle is organized.

Unidentified Speaker

Okay, perfect. Thanks, guys.

Operator

Thank you. Mr. Roosen, there are no further questions at this time. Please continue.

Sean Roosen

Thank you very much, everybody for listening in today and please feel free to give us a call if any other questions come up. And we will be looking forward to catching up with everybody when the fall session starts and hopefully we will organize sit visits this fall. So if anybody has a travel toward Montreal or Toronto coming up, let us know and we will try to make sure that we get everybody to the site that would like to visit.

Thank you very much and good luck with the rest of the reporting session and talk to you all as we get around in August and September. Thank you.

Operator

Ladies and gentlemen, that concludes our conference call. Please note that for a replay of this call can be accessed as of 12 o'clock PM today at telephone number 1-800-558-5253 and entering access code 21668329 followed by the pound key.

This replay will be available until midnight August 16, 2013. Thank you. You may now disconnect your lines.

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