Newmarket Gold's (NMKTF) CEO Doug Forster on Q2 2016 Results - Earnings Call Transcript

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Newmarket Gold Inc. (OTCQX:NMKTF) Q2 2016 Earnings Conference Call July 29, 2016 11:00 AM ET

Executives

Ryan King - VP of IR

Doug Forster - President and CEO

Robert Dufour - CFO

Darren Hall - COO

Analysts

Heiko Ihle - HC Wainwright

Stephen Walker - RBC Capital Markets

Pierre Vaillancourt - Laurentian

Brian Martin - Raymond James

Operator

Welcome to the Newmarket Gold Second Quarter 2016 Financial Results Conference Call and Webcast. As a reminder, all participants are in listen-only mode and the call is being recorded. After the presentation, there will be an opportunity to ask questions. [Operator Instructions]

I would now like to turn the call over to Ryan King, Vice President of Investor Relations. Please begin sir.

Ryan King

Thank you, operator, and good morning, everyone. With me on the call today are Doug Forster, President and Chief Executive Officer; Robert Dufour, Chief Financial Officer; and Darren Hall, Chief Operating Officer of Newmarket Gold.

Today, we will be providing comments on our results for the three and six months ended June 30, 2016 and our outlook for the balance of the year. We will then open up the call for Q&A. The slide deck that we will be referencing during the call is available on our website at newmarketgoldinc.com.

Before we get started, I would like to direct everyone to our Safe Harbor statement on slide 2. Our remarks and answers to your questions today may contain forward-looking information about future events on the Company's future performance. Although forward-looking statements are based on what management believes to be reasonable assumptions, the Company cannot assure shareholders that actual results will be consistent with these forward-looking statements.

The Company disclaims any intention or obligation to update or revise any forward-looking statements resulting from new information, future events or otherwise. For a complete discussion of the risks, uncertainties and factors which may lead to our actual financial results and performance being different from the estimates contained in our forward-looking statements, please refer to our latest quarter-end report. All figures are in U.S. dollars, unless otherwise stated.

With that, I would like to turn the call over to our President and Chief Executive Officer, Doug Forster.

Doug Forster

Thank you very much Ryan and good morning everyone. Welcome and thank you for joining us today for Newmarket Gold second quarter financial results conference call. On slide 3, the Newmarket operations team delivered another consecutive quarter of improved operational performance marked by a record quarter consolidated gold production of 61,191 ounces, a 9.3% increase over Q2 2015. Consolidated gold production for first half of the year 119,248 ounces representing a 3.1% increase over the same period last year. Based on record production to-date, Newmarket Gold is increasing full-year production guidance to 225,000 to 235,000 ounces and lowering consolidated all-in sustaining cost per ounce sold to $900 and $975. Other notable changes to the 2016 corporate guidance revision include an increase investment in growth exploration to $10 million to $15 million from a previously allocated budget of $5 million to $10 million. Exploration success to-date on near mine targets and continued strengthening of the gold price supports the increased growth investment in our assets. During Q2 2016, cash flow from operations totaled $31 million, record quarterly consolidated gold production of 61,190 ounces was primarily driven by a record quarterly performance at our flagship Fosterville mine [Technical Difficulty] during Q2 2016, Fosterville produced a record 37,245 ounces of gold and continued to benefit from the high grade visible gold bearing Eagle Fault zone and East Dipper mineralization which contributed to a 27% year over year increase in average mill feed grade to a record 75 gram per tonne gold.

Our continued focus on process improvement at Fosterville has demonstrated during the quarter with a record mill recovery of 90.8%, 4% increase over Q1 2016 as a result of a successful commissioning of the new circuit which recovered 17% of quarterly production. In terms of costs, Fosterville achieved a record low quarter operating cash cost per ounce sold of $440 and a low all-in sustaining cost of $741 per ounce sold. On a consolidated basis, Newmarket delivered quarterly record low operating cash cost per ounce sold of $673 reflecting the improving consolidated grade and recovery profiles mainly at our Fosterville mine as well as focus on operational improvements and the impact of the weakened Australian dollar. All-in sustaining cost per ounce sold for the quarter was $937 which represents 10% decrease from Q2 2015. Year-to-date all-in sustaining costs are $923 per ounce sold which represents a 6% improvement from the same period last year. With our strong second-quarter performance we generated $17.4 million in free cash flow after investing $3.6 million in growth exploration and development.

On slide 4, record quarterly production results have enabled Newmarket to increase our cash balance to $69.9 million marking a 91% increase in the cash position from the start of the year. As of Q2 2016, Newmarket is well positioned to generate free cash flow with minimal debt of only $2.8 million comprised mostly of capital lease obligations and unhedged productions and with a strengthening Australian denominated gold price which averaged $1,699 per ounce during the quarter. I’ll also mention that we’re extremely pleased to have Eric Sprott as a significant shareholder of the company. Mr. Sprott currently own an approximate 15% equity stake in Newmarket and we look forward to his ongoing support as we focus on growing our production reserves and resources and creating shareholder value.

Before I turn over to Darren for more detailed of our operations and then Rob to review our financial performance, on slide 5 I’d to discuss our exploration and growth highlights during the quarter. In the second quarter, we announced a positive preliminary economic assessment for our 100% owned Maud Creek Gold project. Base case parameters included US gold price assumption of $1,200 per ounce and utilization of the Newmarket permitted and operating Union Reef Mill facility which currently has approximately 1.2 million tonnes of excess process capacity. The PEA delivered strong project economics including a pre-tax NPV at a 5% discount rate of $155 million and IRR of 116% and a payback period of 1.25 years. Newmarket is currently reviewing options to move the projects forward including a tender process to proceed to a full feasibility study.

On slide 6, during the quarter Newmarket announced multiple significant drill results from our flagship Fosterville gold mine. We currently have eight drill rigs in operation which have returned numerous high-grade drilling results. This June, we announced our first for quarter intercept continuing visible gold in Harrier gold system. To date, Harrier drill results are very encouraging and suggest strong potential for conversion of mineral resources from this area. The results also indicate an increasing grade profile with depths below the 4,450 meter RL level similar to the Lower Phoenix gold system where we have abundant visible gold. Highlight intercept include 22.1 gram per tonne gold over 3.3 meters and 16.6 grams per tonne gold over 3 meters. In the Lower Phoenix South gold system both drilling has demonstrated strong potential for resource expansion with drilling results including 12.75 gram per tonne gold over 4.5 meters. Additionally, on Lower Phoenix North located up-plunge of current reserves and resources drilling intercepts include 12.5 grams per tonne gold over 2.4 meters and 7.3 grams per tonne gold over 13.9 meters. Ongoing drilling continues to support increased growth spending with a focus on increasing resources and reserves at Fosterville. Looking at slide 7, current growth drilling at Fosterville is focused on expanding reserves and resources and establishing additional mining fronts at Harrier and Lower Phoenix North with the goal of increasing the production profile and mine life of flagship operation. To date, the Lower Phoenix gold system has been traced by development and drilling for over 2 kilometers and remains open for further expansion.

I will now turn it over to Darren Hall, our Chief Operating Officer.

Darren Hall

Thank you, Doug, [indiscernible] Newmarket Gold and we are committed to providing a safe and healthy workplace for all employees and business partners. As we continue on our journey to zero harm, I'm pleased to report a 47% reduction in how year-to-date 2016 lost time injury frequency rate compared to the full year of 2015. Starting on slide 9, as Doug mentioned earlier flagship operation Fosterville was a primary driver of record consolidated second quarter results. Fosterville delivered record quarterly production of 37,245 ounces, a 26% increase over Q2 2015. In doing so, Fosterville established record quarterly results for mill grade of 7.5 grams per tonne gold and recovery of 90.8%. Our primary driver in the increase from recovery was the injury free on schedule budget delivery of the gravity gold circuit which recovered 17% of the second quarter's production. As part of a longer term mobile fleet optimization strategy at Fosterville, the operation took delivery of a placement hold truck in Q2 and committed to the purchase of two additional replacement hold trucks which will be in operation during Q3. These three units replace older lower capacity and higher cost machines.

An aggressive growth drilling program continue at Fosterville with eight drills currently in operation on a range of infield resource definition and exploration programs which continue to yield strongly positive results. Turning to the Northern Territory on slide 10, Cosmo produced 15,442 ounces of gold in the second quarter. During the first half of 2016 gold production was 31,782 ounces, a 24% increase over the second half of 2015 due to higher grades and improved mill recoveries. Recovery for the second quarter improved to record 94.2% as a result of the change in processing strategy implemented in March to cap the mill throughput rates to 2,500 tonnes per day which increases dissolved oxygen levels improving leaching kinetics resulting in higher gold recovery. Turning to Stawell on slide 11, gold production totaled 8,504 ounces during the quarter consistent with the first quarter of the year. Our continued focus of the second half of 2016 will be further developing our understanding of Aurora B gold discovery on the east flank of the Stawell gold system as drilling continues with two rigs in operation. Newmarket continues to actively engage with regulators to establish a path forward for the Big Hill project, an important growth opportunity both for the Company and the community of Stawell.

I will now turn it over to Robert Dufour, our Chief financial Officer.

Robert Dufour

Thank you Darren. Just a quick reminder as we start that all figures are reported in US dollars. Turning to slide 13, record quarterly production resulted in the sale of 62,223 ounces of gold at an average realized gold price of $1,253 per ounce generating $78 million of revenue. An 18% increase over Q2 2015. In Australian denominated terms in the second quarter where we realized an average price of almost AUD1,690 and actually exceeded AUD1800 at certain points towards the end of the quarter. Newmarket Gold is currently completely unhedged with minimum debt and allows us to benefit fully from increases in the price of gold. Increased revenue resulted in record mine operating income for the quarter of $28.1 million, a 44% increase over $19.5 million in Q2 2015 and notably a 60% increase over the first quarter of this year. Operating cash costs per ounce a record quarterly low of $673 per ounce driven by Fosterville which accounted for 61% of the gold sold during the period.

Operating and royalty expenses of $42 million were up 11.5% compared to Q2 2015 partly the result of a shift to total extraction mining method at Fosterville to optimize the higher grade recovery. Royalty expense was also comparatively higher as a function of production and gold pricing which consolidated depletion and depreciation was lower driven mainly by longer life at Fosterville. Looking to the bottom line the company posted net income of $16.8 million or $0.10 per basic share compared to net income of $12.1 million in Q2 2015 or $0.10 per share. The unchanged basic EPS over the two comparative quarters despite the higher Q2 2016 net income is reflective of the higher weighted average number of basic shares outstanding. And this is predominantly the result of the conversion and redemption of 34.5 million of debentures during the first quarter of 2016 which left the Company largely debt free.

Net income for Q2 2016 reflects $3.6 million of growth exploration as the Company focuses on growing its resources all the while continuing to maintain strong cash flow generation, year-to-date exploration in 2016 of $7.5 million is more than double the spent in 2015 for the same period. Net income was also impacted by higher share based compensation of 2.3 million and this was largely due to divesting of the company's performance share units or PSUs whose share performance vesting terms were triggered as a result of the 76% increase in the company's share price on the TSX in the second quarter. The 180% increase in the company's share price for the first half of 2016 was also the main driver of the 3.6 million in share-based compensation year-to-date. Just to round that out, as of June 20 all of the share price linked PSUs have now vested. The company also recognized a deferred tax expense of $2.8 million in the quarter, driven by Forsterville’s performance and the strong Australian dollar gold price environment. Depending on production and gold price trends for the rest of the year the company’s Victorian operations may be cash taxable in the near term.

In terms of cash flow, the company's operation generated $31 million in Q2 2016 as compared to $27.1 million in Q2 of 2015. The 15% increase in operating cash flows reflects the 18% increase in revenue owing to record production and higher gold prices while also reflecting the ongoing investment in exploration and evaluation programs. Newmarket invested further $13.6 million on mine development and plant and equipments in Q2 with a focus of mine development expenditure at Fosterville.

And with that I will turn it over to the operator to open up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first next question comes from the line of Heiko Ihle from HC Wainwright. Your line is open.

Heiko Ihle

Congratulations on a strong quarter here, it’s nice as the market corporate with strong management performance and company doing things right. It is good to see.

Doug Forster

Thank you.

Heiko Ihle

If we’re looking into full-year cash flow, I mean you came in at 49.3 million for the first half, is it fair to trend line that as a 31 million you made in Q2 or should be a sort of double it given that 50 million was in the first half and my gut feeling is that trend line the 31 million is more accurate but I just want to double check?

Robert Dufour

Heiko, it’s Rob here, thanks again for calling in. We did provide updated guidance this quarter and I think that align some of the other components that drive costs like our operating cost per ounce. So I think using those as a baseline that will give a sense of where we think we’re headed. Obviously a big component of that number is going to be gold price and we don't guide gold price, I mean, ultimately that's the one thing we don't control but certainly cost and production we try and control those to our best. So using our guidance ranges that we provided that should give you a sense of where we are headed I think.

Doug Forster

Pick your deck for gold, obviously that will clearly affect the cash flow.

Heiko Ihle

Guidance to the gold price, I mean, right now you guys were talking about the high prices in Australian dollars terms that you sold the gold at, I mean at some point in time that’s probably going to reverse or at least slowdown, at what point in time should we expect to see you guys doing some hedging?

Robert Dufour

It’s a good question, obviously the focus of the company is on costs, watch the gold price and the FX as well Heiko, and at the moment we are unhedged, and we are either on the FX or on the metal. When we look at all the consensus going forward, obviously I think the weak Australian dollar will continue obviously until iron ore picks up in that country, it’s probably going to be a weak currency but if you look back in 2011 when gold was hitting an all-time high in the US funds, you had the Australian dollar at par or better than par and you had the gold price in Australian funds also at all-time high, we actually just hit a new record all-time high earlier this month. So to answer your question we continue to monitor the situation but this time we have no plans to put in FX hedging or metal hedging but that could change at the board level as we do monitor progress.

Heiko Ihle

[indiscernible] $1700 gold hedges to that US dollar. Fair enough, I then I hate doing what I’m about to do, but I got to do it anyway because I asked you the same question in one of these calls in the past. You're standing at 70 million of cash, you essentially have made that, all indicators are that you're making another chunk of cash for the rest of the year. I mean at what point in time are you guys going to do something with all that cash. I mean, I'm personally in favor of you buying something else because clearly you've done a decent job at buying underappreciated assets but I mean, I assume your shareholders would want you to do something, something, anything like you did it in share repurchase, I mean any thought you could share?

Robert Dufour

Well, I mean, again these are things that we do discuss at board meetings, currently there is no plans for a dividend, our preference at the moment is to invest that excess capital in our operations which we’re doing as we say we raised our growth budget for the year substantially on this report. Nothing is ruled out as usual, obviously we are looking at M&A, we are looking at investing in other opportunities but we’re very cautious investors as I said probably last time you asked this question. We are active in the space but we're being very prudent both with our capital allocation and obviously with our M&A strategy. So all these things are on the table Heiko but at that moment obviously we don't talk about in terms of tracking into one of those whether it be a dividend or share repurchase or M&A. But certainly we're happy to be - we’re very happy to have our 70 million US in the treasury and essentially no debt, strong balance sheet was a mandate that we came into when we started Newmarket one year ago and we've achieved that but we’re not stopping here.

Operator

Your next question comes from Stephen Walker of RBC Capital Markets. Your line is open.

Stephen Walker

Great. Thank you very much. Good morning. Just a couple of questions. Maybe, Darren, the guidance, cost guidance across the board, Fosterville, obviously a nice improvement, Cosmo and Stawell are up significantly for the balance of the year. Can you talk a little bit about what 2017 and ‘18 could look like? Is this a temporary bump in operating cost that's driving the increase in cash cost per ounce, is it a grade driven at Cosmo and Stawell, if you could talk a little bit about that? And then just in the same breath, whether Fosterville is sustainable at these lower levels into the next couple of years as well?

Darren Hall

Good morning, Stephen. How are you doing? Yes. I will start with Cosmo. I mean, some of the unfavorable results we see from an operating cash cost perspective is really, you can't really attribute a significant portion of it to changes in capital versus operating spend and we saw reduction in capital development in the first half of the year and increase in operating development. So the development rates are about the same, but again the bucket of cost that went into was into the operating cost portion. So that kind of washes out there for Cosmo. As we look forward at Cosmo, we’re actively drilling and looking at opportunities there. There will be more information as we head into the third quarter in terms of announcing some of those results, which I think will put a different complexion on 2017 as we go forth. In the Stawell space, our focus there is obviously progressing discussions with the regulators with vis-à-vis Big Hill and obviously continuing the active exploration program there with Aurora B [indiscernible].

Doug Forster

I don't think so at this point. Yes, I think, Stephen, it’s Doug here. We have seen improvement in Cosmo H2 last year versus H1 this year. We've seen improvement in production. Some improvement in mining tons and improvement in grade. So we’re on the right track with Cosmo. Obviously, we’ve been as Darren said on operational development, that 6 rig drill drive that was completed. Now, we are drilling the silver and the hinge zones, as we speak, and that will obviously direct us for next year and beyond.

And at Stawell, clearly, it's a cash flow neutral type mine for us currently and the reason we're not at this point with that is that we’ve made a significant discovery there in Aurora B and we’re really preserving advancing those opportunities, both at Aurora B and Big Hill. That’s really ultimately the feature of Stawell. Yes, there is opportunity on the west flank, but it’s East flank where we obviously have our initial resource and we’re going to advance that.

Stephen Walker

Okay. Thank you for that. Just maybe a follow-up question on Fosterville. When you look at the exploration successor on Phoenix and Lower Phoenix, can you talk a little bit about the antimony, the stibnite mineralization and the antimony that is there and how you’re looking at, if you like, the mass balance of stibnite rich ore, which you want to minimize, albeit with higher rates and then higher grade non-refractory ore. When you look out over the next two to three years, do you see a fair balance between non-refractory, if you like or stibnite rich material if you like versus the non-stibnite rich and to make it easier, do you see more non-stibnite rich material showing up in the exploration drilling, which will make that, if you like, mass balance easier as you are putting materials into the plant?

Doug Forster

It's a good question. In terms of the non-refractory material, primarily it’s visible gold, we’ve got 17% recovery in the gravity circuit on the first quarter of full operation. Can we see improvement in that? I think we could. Obviously, it depends on how much Eagle and East Dipping Mineralization is going through, non-sulphide mineralization is going through the mill at any one time. We are seeing for instance, opening up at Harrier mining front, we’re seeing low stibnite there or no stibnite and we’re now getting some visible gold in that system at about the same datum that we started getting visible gold over at the lower Phoenix.

So that bodes well for the future in terms of opening that mining front up and having low stibnite material, low antimony material coming from that area. Same with Lower Phoenix North. We don't see a lot of stibnite, up in the north and that bodes well again for having material to blend with the higher stibnite ores that we do get, absolutely in the Lower Phoenix system. So the mill manages stibnite very effectively over almost a decade now. It's gone very well, but yes, we do blend and we certainly could see additional visible gold component, gravity component going forward, but that again will depend on how much Eagle goes through the mill.

Darren Hall

Stephen, just to layer that is that again, the way I consider stibnite is that it's not a constraint, it is a condition to which we manage too and we have significant levels of flexibility within the mining space and as we continue to have exploration success, it allows to more flexibly buy in acquisition mining front and that will allow us then to realize that additional capacity that sits there in the plant as well.

Stephen Walker

Darren, just one last follow-up if I might. Potential timing of pulling tons from Lower Phoenix North and Harrier zones. What could you see as timing to be developing and producing from those areas?

Darren Hall

Again, as success delivers from the drill bit, we will continue to expand into those areas. So again as we continue our mining development plan, we are extending up-plunge and down-plunge through the Lower Phoenix system. So I think we’re going to see just a continuous sort of evolution through that mining zone. I think I would probably direct more to some of the results we issued there in June with respect to Harrier, how does that start to play into incremental chunks of capacity looking forward as well.

Doug Forster

Stephen, we’re drilling almost 500 meters of plunge now in Lower Phoenix North from the known reserves and resources. So with continued successes we've had obviously, it would certainly be management view that we’d want to hopefully accelerate development of that way, we still have some drilling due to make that decision.

Darren Hall

I guess as we've talked, we meant just a little bit ago, these up-plunge, down-plunge, these step outs that we’re drilling in the second half of the year are going to be transformational in terms of understanding the assets, which allow us to better plan and be able to better address and specifically answer those questions, as we then develop a five-year plan for the asset.

Stephen Walker

Okay. Thank you, Darren. Thank you, Doug. That's it for my questions.

Operator

[Operator Instructions] Your next question comes from Pierre Vaillancourt of Laurentian. Your line is open.

Pierre Vaillancourt

Hi, guys. I was wondering, Doug or Darren, if you could talk about the prospect for increasing your capacity at Fosterville, you had 170,000 tons ore milled this quarter, you’ve got notional capacity of 750,000 tons a year, how - can you push that under the current conditions at the mill?

Doug Forster

Yes. You're absolutely, Pierre, and thanks for your question. We certainly have that excess capacity in the process facility at Fosterville. We’d love to turn that up. That will require some additional mining fronts to be brought on stream and to pull the prior question from Stephen, we’re working diligently on that to open up the new mining front, but that is certainly a significant organic growth opportunity for us at Fosterville. That excess capacity and with the results we’re seeing from Lower Phoenix North, with the initial results, albeit early, we've completed 57 holes there at Harrier.

Good start, we are doing that again in the second half of the year. We see good potential results coming out of there and the conversion of resources to reserves and the other thing we’re doing and we’ll talk more about this upcoming is we are doing our first real Brownsfield, if you will, exploration at Fosterville. We’re going to be investigating a known drilled area called Robin’s Hill, it’s just north, it’s on the structure just north of the mine, on the mining lease and we’re pretty excited about that, we’ll do our first drilling there, first deep drilling ever done, deeper drilling if you will on that project coming up, which also could in the future. Again, it is our first drill campaign then. There has been previous good grade drillers at Robin’s Hill. That could be another mining front for feeding that excess capacity in the mill. So, lot of opportunities to fill that capacity, but we're not quite there yet, but a good opportunity for new market in for Fosterville.

Pierre Vaillancourt

Okay. So it sounds like that whole situation isn’t going to change any time soon, subject to development at Lower Phoenix and other areas there?

Doug Forster

Yes. So far, it's been grade as opposed to tons that’s been increasing our production profile at Fosterville.

Darren Hall

Pierre, just on that as well, part of the strategy here in terms of the equipment rationalization, looking at these larger trucks that allows us to lower cost more safely, but has importantly more productively produces well, which allows us to be able to leverage up volume as well. We’re currently - one of the considerations is the number of working areas we have, so obviously, the more tons we can get out of each of those working areas is going to be accretive. So going to larger trucks allows us to be more productive on the cycle, which potentially has a positive impact and then as we start to look at opening up additional mining areas vis-à-vis Harrier, up-plunge, down-plunge at Lower Phoenix, you’ll see how all these comes together in the not too distant future hopefully.

Pierre Vaillancourt

Right. And just moving on to the cost and the style, you were talking about silver and hinge zones at Cosmo and Aurora B, how do you see that in terms of actually that becoming part of the mine plan or becoming a developable reserve. I mean, are you still a long way off there or?

Doug Forster

Let's talk about Cosmo first, Pierre. We're actually mining silver now, so it is developed. We’re doing more development, both in silver and the hinge. We will have an update in the third quarter on drill results from sliver and hinge and I think that will help to frame the picture going forward, but that area is certainly a priority to us. Why? Good grade and so we like the silver and hinge, but it is going through the mill now, so we're certainly well-developed.

Aurora B, it is obviously a little further off. We are only 200 meters away with development from Aurora B. We have two rigs active there now drilling. We have this resource, it’s about 150 meters by 150 meters striking and we're stepping out from that and down-plunge if you will along that Eastern front, along that part of the contact and as we announced in the, I think it was in the physicals, we have seen continuity of mineralization, a long strike and we will get an update out on that as well. So two rigs active at Stawell on Aurora B, we have three rigs at Cosmo drilling hinge and silver.

Pierre Vaillancourt

Okay. So it seems to me that in order to see any transformative change, you need Maud Creek at Cosmo and Big Hill installed to really move the needle there?

Doug Forster

Maud Creek is an excellent opportunity for the mill and for the Northern Territory for us, absolutely. And as we've indicated, we are tendering out a feasibility study there and looking at that, the PEA had excellent results, so that is an opportunity for a mill that has essentially 1.2 million tons of excess capacity. We could truck that Maud Creek ore over there and process it. That is a good opportunity.

Operator

Your next question comes from Brian Martin of Raymond James. Your line is open.

Brian Martin

Yes. Thanks guys, thanks for taking my questions. A lot of substance covered already, but just a couple of things here. On the grade profile at Cosmo, is that 3 gram per ton level, is that something we should be looking at moving forward, just chatted previous caller about some drill results coming up, but is it grade taking up towards reserve grade in the back half of the year and on the cost side, I mean, is that cost per ton number again sort of sustainable number, in terms of getting the operating cost down, just a function of grade coming up?

Doug Forster

Yeah. Thanks for the questions. I mean with respect to Cosmo and grade, we know what our reserve grades are and we, longer term and that's what we expect to be able to deliver into. So that 3 to 3.5 grams is where we fit form a Cosmo perspective, so we're comfortable with our reserve estimates and again, we'll see some variability quarter to quarter depending on which part of the ore body we're in. So yeah, and we provided guidance for the balance of the year and I think that kind of sets the framework for Cosmo for 2016.

Brian Martin

Great. Thanks. I guess this one is for Rob, I mean, given the strong performance with Fosterville, what is the status of those tax losses, and why wouldn’t you guys be modeling to become a net tax payer there?

Robert Dufour

Thanks. Good question and that situation has changed quite a bit over the last while, but for all the right reasons and certainly that obviously, it depends very much on what you assume for gold price, but certainly at this strength, we do think in the near term, at some point, we will become cash taxable, as those tax losses get used up. It's hard to be too specific given the amount of variables that go in there, but somewhere over the next 6 to 12 months probably is not unreasonable and I think depending on how you're modeling it, I would assume and your gold price, that's probably, I think that's probably fairly realistic.

Brian Martin

Great. Thanks, Rob. And I think that you touched on this a little bit earlier, but obviously you guys are at a much better position financially than you're now and generating significant amount of cash. Just wondered maybe if you could touch on how you go to think about your capital allocation strategy here in terms of your internal versus external projects and possibility of a dividend coming online for maybe in the future. So just maybe talk about that. Thanks.

Robert Dufour

Yeah. Brian, I mean obviously capital allocation is critical to us and you can see obviously our investment in Fosterville, in terms of our sustaining capital, it's about 80% is going there for obvious reasons. It is our flagship asset, not that we're ignoring our other two, but that's just the way the guidance portray and that's why we're spending our capital in terms of sustaining.

Again, we get asked a lot about dividend. At the moment, the board is happy with not paying one, that’s not to say we'd rule that out as we increased, you're right, we've done very well this year, increasing our cash 91%. If that continues, wouldn't rule it out, but certainly haven't ruled it in. As I mentioned earlier in the call, Brian, having a strong balance sheet was our goal in the first year of Newmarket Gold, we started to achieve that with minimal debt, almost no debt and $70 million in cash. So we'll keep all options open. Obviously, we're looking at M&A as well as you said, external opportunities and having a strong balance sheet, having cash for that opportunity should that materialize is also something that's important to us.

Brian Martin

Great. Thanks and congrats on a good first half of the year. Cheers.

Operator

Your next question comes from the line of [indiscernible]. Your line is open.

Unidentified Analyst

Just on indicated resources, which are, going forward, when do we expect, what's the timeline like on conversion into measured or is there?

Doug Forster

And thanks for the question Clive. As you can see, our indicated, measured indicated resource grade at Fosterville is significantly lower than our current millhead grade. So we're focused going forward on, we're not ruling out, obviously, converting those, some of those lower grade resource ounces, but we're very in tuned, very focused on outlining quality ounces in terms of reserves and resources at Fosterville and for us, that’s the new discovery we made last year, the Eagle and East Dipping Mineralization, the high grade visible gold bearing material. So we're really focused on that. It doesn't mean, we're still very happy with the large M&I resource at Fosterville, which can be tapped into in successive years and will be, but at the moment, we're very focused on that higher grade quality mineralization we're seeing in the lower Phoenix area.

Unidentified Analyst

And that's not yet in the reserve obviously, right?

Doug Forster

Well, we did publish, at the end of the year, we had a small reserve for Eagle, again, we'd only had about a quarter and a half of drilling that. Obviously, we'll have an update, we'll do our next reserve and resource at year end and that will be published in the March period 2017 and obviously that will include all the drilling we've done, the Phoenix, Lower Phoenix, potentially Phoenix North, if we get enough drill density there and obviously over Harrier as well.

Unidentified Analyst

How would the Harrier South, any drill success continued as the drill comes success, delimiting a further mining area, how would you access that, is it just a continuation of what you're [indiscernible]?

Doug Forster

Yeah. The Harrier declines right there, we're mining. Last year, we took perhaps 10% of our throughput out of Harrier, this year, it's nominal. But we're just using that decline access from surface, it gives us excellent access to the drill drives that we're currently both focused on extending the resource base at Harrier and also converting resources to reserves down at that 44, 50 meter level. So access is intact, it's excellent.

Unidentified Analyst

How long is it taking for the trucks to go ore along the ground to surface?

Doug Forster

Yeah. I guess, it depends on exactly which mining front you're in, and again, it's using an average is always a little bit dangerous, but we're probably looking at that 30 to 40 minutes in terms of a cycle.

Unidentified Analyst

Okay.

Doug Forster

That's one of the reasons Clive we're upgrading our fleet of trucks there at Fosterville, both from a capacity and efficiency standpoint. So that's going to help us on cycle time as well.

Unidentified Analyst

Okay.

Operator

And there are no further questions at this time. I will now turn the call back over to Doug Forster for closing remarks.

Doug Forster

Thank you very much operator and thanks very much for dialing into our second quarter conference call with Newmarket Gold. As usual, if you have additional questions post this call, please don't hesitate to contact myself or Ryan King or any of our senior leadership team, we're always available for questions and have a great, long weekend if you're in Canada or the US. Enjoy the fine weather wherever you are and we look forward to talking to you on the next quarter call.

Operator

And this concludes today's conference call. You may now disconnect.

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