Goldcorp's (GG) CEO David Garofalo on Q4 2016 Results - Earnings Call Transcript

| About: Goldcorp Inc. (GG)

Goldcorp Inc. (NYSE:GG)

Q4 2016 Earnings Conference Call

February 16, 2017, 1:00 PM ET

Executives

Lynette Gould – Director-Investor Relations

David Garofalo – President and Chief Executive Officer

Todd White – Executive Vice President and Chief Operations Officer

Russell Ball – Executive Vice President and Chief Financial Officer

Paul Harbidge – Senior Vice President, Exploration

Analysts

Andrew Quail – Goldman Sachs

Piyush Sood – Morgan Stanley

Greg Barnes – TD Securities

David Haughton – CIBC

Mike Parkin – Desjardins

Steven Butler – GMP Securities

Christopher Terry – Deutsche Bank

Michael Jalonen – Bank of America Merrill Lynch

Anita Soni – Credit Suisse

John Tumazos – John Tumazos Very Independent Research

Yuriy Vlasov – Berenberg

Operator

Good morning, ladies and gentlemen. Welcome to the Goldcorp Inc. Q4, 2016 Results Conference Call. Please be advised that this call is being recorded. I would now like to turn the meeting over to Miss Lynette Gould, Director, Investor Relations of Goldcorp. Please go ahead, Miss Gould.

Lynette Gould

Thank you, operator. And welcome to the Goldcorp fourth quarter 2016 conference call. Our presenters today are David Garofalo, Goldcorp's President and Chief Executive Officer; Todd White, Executive Vice President and Chief Operations Officer, and Paul Harbidge, Senior Vice President, Exploration. Accompanying David and Paul for the Q&A portion will be Russell Ball, Executive Vice President and Chief Financial Officer; Brent Bergeron, Executive Vice President, Corporate Affairs and Sustainability, and Charlene Ripley, Executive Vice President, General Counsel.

For those of you participating on the webcast, we have included a number of slides to support today's discussion. These slides are available on our website at www.goldcorp.com.

As a reminder, comments made on today's call may contain forward-looking information and this information, by its nature, is subject to risks and uncertainties and, as such, actual results may differ materially from the views expressed today. For further information on these risks and uncertainties, please consult the Company's relevant filings on SEDAR and EDGAR. These documents are also available on our website.

With that, I will now turn the call over to David Garofalo. Dave?

David Garofalo

Thanks, Lynette. Good morning, everyone, and thank you for joining us today. During the fourth quarter, we saw a 24% lower all-in sustaining cost of $747 per ounce of gold sold compared to the fourth quarter of 2015, reflecting the Company's focus on cost efficiencies as well as the impact of the strengthening U.S. dollar against the Argentine and Mexican pesos. This was partly offset by planned lower production of 761,000 ounces of gold as a result of the exhaustion of surface stockpiles at Cerro Negro and Éléonore and lower tonnes mined at Los Filos in line with the revised mine plan.

Strong production during the quarter was primarily driven by Peñasquito as higher grade were mined as expected. With solid performance across the portfolio during the quarter, we achieved our full year guidance with production of 2.873 million ounces at all-in sustaining costs of $856 per ounce. We achieved the very lower end of our all-in sustaining costs guidance range from the continued progress on our cost efficiency program of $250 million. We have identified over 60% of that target, with 40% delivered by the end of 2016 and remain on track to achieve the full target in 2018.

In January, we set out a renewed growth strategy that is projected to achieve over the next five years, a 20% increase in gold production, 20% increase in gold reserves, and a 20% production in all-in sustaining costs. The ramp-up to nameplate capacity at Cerro Negro and Éléonore, a continued focus on productivity and efficiency improvements at the existing camps and advancing the robust project pipeline will position the Company to deliver on our growth and deliver increase in net asset value per share.

For 2017, our production is projected to be approximately 2.5 million ounces at all-in sustaining cost of $850 per ounces and expected to grow to 3 million ounces at all-in sustaining cost of $700 per ounce within five years.

M&A has always meant more than just acquiring good assets at the right prices. The hefty non-core asset has played an equally important role within the Company as we constantly seek to upgrade the overall quality of our assets portfolio. In January of 2017, we saw both, the Los Filos mine in Mexico and the Cerro Blanco project in Guatemala for approximately $500 million in total consideration. This is capital. We've already begun to cycle into the acquisition construction of our Coffee project in the Yukon which we believe has the potential to represent a new significant mine camp and to further consolidate our position in the large scale NuevaUnión deposit in Chile by buying back the 4% gold stream.

Turning to the fourth quarter results. Cost efficiencies and the strengthening U.S. dollar against the Argentine and Mexican pesos grow all-in sustaining cost down to $747 per ounce compared to $977 per ounce in the fourth quarter of 2015. The same factors impacting production in all-in sustaining cost resulted in adjusted cash flows from operations of $383 million, which we used to repay $169 million in debt, $61 million to fund the growth pipeline and $16 million to pay dividends.

A year ago, we laid out a strategy focused on growing net asset value per share and compounding the returns from our existing mines into organic growth and brownfield exploration around existing infrastructure, which we believe provides the best returns at the lowest risk.

We are delivering on that strategy. We undertook a large scale restructuring of the organization to reflect the fact that we had exited a period of large capital expenditures in mine construction. We drove accountability down to the mine sites through flattening of the organization and removing a full layer of management. We also strengthened not only our mine general managers, but also some of our key senior position.

Another key focus during the year was overhauling the planning process under Todd's leadership. The new process risk-adjusts our production estimates, budgets, targets and forecast, so we have a much better opportunity to achieve and hopefully exceed our targets going forward.

We also continue to invest in our pipeline and advance a number of projects forward, with a capital commitment over of over $1 billion. It has been a very busy year as we transition to the harvest mode, but we now we have a structure and people in place to see increasing that asset value per share to drive long term shareholder value.

With that, I will turn it over to Todd for a review of the operations and projects.

Todd White

Thanks Dave. I just want to start by touching on safety first, as it is foundational to our business. The safety of our employees is our primary objective and our vision is safe enough for our families, which means that any one of our family members could go to work at our sites and know that they would arrive home safely.

I think that safety is foundational not only because it produces great results and that we have our employees going home safe every day, but I think of safety as providing a culture for our operations. The culture that is required to drive the results that you see on this slide, in terms of a decline in our all-injury rate is a culture of personal accountability. That's exact same culture that I'm looking for that produces consistent and predictable operational results.

Now turning to our operations. Peñasquito saw increased production compared to the fourth quarter of 2015, as mining of the higher grade ore from grade Phase 5D continued as expected. Production in 2017 will decline over 2016, as we complete mining of Phase 5D and we transition to predominantly lower grade ore from stockpiles in the second half of the year. Concentrator throughput during 2017 is expected to between 105,000 and 110,000 tonnes per day with gold grades averaging 0.53 grams per ton.

At Cerro Negro, production was lower than the fourth quarter of 2015 as a result of the exhaustion of stock piles in 2015 as well as disruptions from the restructuring that resulted in a significant workforce reduction. During 2017, production is expected to increase compared to 2016, as the mine continues to ramp up.

Costs are expected to be consistent with 2016 and throughput is expected to average 3,000 tonnes per day with grades increasing from approximately 11 grams per tonne to 15 grams per tonne by year end, as the higher grade Mariana Central provides more of the ore feeds.

A pre-feasibility study for the Mariana Complex was completed in the fourth quarter, and it set out the optimal mine design, development sequence and production schedule to maximize net asset value for that area. The plan was development at Mariana Norte continuing to ramp up through 2017 with first ore production expected in 2018. Development of the Emilia vein is expected to begin in the second half of 2017 and is expected to replace production from Eureka in 2019. The plan anticipates achieve sustaining mill throughput of 4,000 tonnes per day in 2018.

At Éléonore, gold production was lower compared to the fourth quarter of 2015 as a result of lower grades, which were in line with the mine plan, as well as the exhaustion of service stockpiles, which were processed in 2015

The fourth quarter was the first full quarter with the production shaft fully operational, and I'm pleased to say there were a number of days of over 8,000 tonnes per day from that shaft. The loading pocket at the bottom of the shaft was completed during the quarter which now provides the platform from which to deepen the underground development.

The team at Éléonore is working on accelerating the underground development to feed the mill to design capacity, while bringing the fifth mining horizon online in 2018.

During 2017, as the mining rate ramps up, gold production is expected to increase over 2016 with throughput increasing from 5,200 tonnes per day to 5,900 tonnes per day by the fourth quarter. All-in sustaining costs are expected to be fairly consistent with 2016. However operating costs are expected to decrease as the mine benefits from a full year of production from the permanent ore handling system, including the production shaft, as well as efficiencies from prior throughput rates.

Higher cyclical sustaining capital related to the tailings expansion and waste rock pad expansion will offset the benefits of declining operating costs of 2017.

At Red Lake, production decreased compared to the fourth quarter of 2015 due to lower tonnes from the depletion of the Campbell mine, as well as the focus on mine development to increase mining front availability. We continue to drive down our fixed cost structure through the rationalization of underutilized infrastructure.

In the first quarter, the Red Lake mill was put on care and maintenance, and the Campbell shaft is planned to be put on care and maintenance in the second quarter of 2017.

Production in 2017 is expected to decrease compared to 2016, as a result of lower overall grades as the high-grade zone depletes. Costs are expected be consistent with 2016, and over the long-term there is potential to increase production from our two growth projects Cochenour and HG Young.

At Porcupine, production decreased compared to the fourth quarter of 2015, as a result of the depletion of Dome underground, lower tonnes milled due to depletion of the lower stockpile grade that was partially offset by the increased production of Hollinger open pit. In 2017 production and costs are expected be consistent with 2016.

Musselwhite continue to be a consistent performer during the quarter with solid production and low operating costs. Production in 2017 is expected to be consistent with 2016, while cost will trend higher as a result of additional capital development to increase mining front availability and derisk future production.

Pueblo Viejo had a strong fourth quarter with solid gold production and low all-in sustaining costs. Production in 2017 will decrease as a result of lower grades and Costs are expected to increase as a result of receiving non-recurring insurance proceeds in 2016 and higher sustaining capital expenditures.

Turning to our robust project pipeline that I expect will contribute to a meaningful increase in our net asset value per share growth, we continue to advance a number of our projects during the quarter. The Pyrite Leach project at Peñasquito achieved 65% engineering progress by the end of 2016, while procurement activities are well advanced to support execution. Major works contractors are mobilized on site and construction of permanent facilities has been initiated. The materials handling project at Musselwhite is progressing well and by the end of 2016, approximately 90% of detailed engineering had been completed.

Moving to Borden, we have received all material required permits to allow for the construction of a ramp into the deposit and the extraction of a 30,000 tonne bulk sample. The ramp design for the purpose of the bulk sample will also be sufficient for ultimate mining purposes. The underground platforms developed from the ramp access will further support exploration drilling of a deposit that remains open at depth and laterally.

Moving up north to the Coffee Project, we continue to focus on optimizing of the feasibility study, planning for upgrades the site infrastructure as well as First Nations and community consultation. The Environmental Socioeconomic Assessment application is being prepared and is expected to be submitted to the authorities in the first quarter of 2017.

At NuevaUnión project, a pre-feasibility study is underway and is expected to be completed by the end of the third quarter this year, following which the feasibility study will commence in the fourth quarter.

The Century Project advanced to the pre-feasibility stage, which is expected to be complete in the fourth quarter of this year. In addition to the current mineral resource estimate at the Dome pit, the pre-feasibility study will also incorporate a review of additional potential mill feed, including the Pamour Open Pit and the Pamour West Open Pit.

At Cochenour, we put approximately 13,000 tonnes from the 3990 and the 4060 levels through a sample tower and then through the mill where we have experienced consisting grade reconciliations for our resource model through the mill. We are in the midst of completing the concepts study which has shown positive economic for a starter mine. Following the completion of this study in the first quarter of 2017, we will advance into a pre-feasibility study at Cochenour.

Staying in the Red Lake camp, at HG Young, during the fourth quarter exploration drilling continued with a focus on expanding the current resource and upgrading the structural understanding of the mineralized system. During the first quarter of 2017, the geological interpretation and resource model will be updated and used to update the concepts study. Assuming a positive business case in the concepts study, we will commence a pre-feasibility study in the third quarter of this year.

Part of our strategy to increasing net asset value is driving down our costs and increasing productivity. We continued to steadily progress towards our target of $250 million in annual sustainable efficiencies by 2018. During the fourth quarter, Porcupine identified $35 million of cost savings and efficiencies, and that has been added to the savings identified as Cerro Negro and Corporate where we've identified over 60% of our target and delivered 40% of that by year end.

Peñasquito is in the early stages of this process, but expects to realize approximately $55 million in annual sustainable efficiencies. Potential opportunities relate to improved mining and processing equipment utilization and ongoing cost reductions from major contracts. Red Lake and Éléonore have started their productivity and cost optimization improvement last month, along with Cerro Negro and Musselwhite will achieve the balance of the $250 million target. We remain well positioned to meet our target of $250 million by 2018 if not exceeded.

Our robust internal pipeline which will drive economies of scale through Brownfield expansions and our relentless focus on sustainable cost efficiencies is expected to deliver peer leading gold production growth of 20%, while driving down all-in sustaining costs by 20% over five years.

I should add that while we are optimistic for the potential of Cochenour, HG Young, Dome Century and the NuevaUnión to contribute meaningfully to our production and NAV growth, we have excluded them from our current projections until we make an investment case for each project. Another important part of the strategy to grow NAV per share is a targeted increase in gold reserves up 20% from our existing portfolio over the same time period.

With that, I will now turn it over to Paul for review of our exploration activities.

Paul Harbidge

Thank you, Todd. We are centered in the Americas, where I see significant potential for reserve growth given our portfolio of under explored high-quality, geologically diverse assets. Following the implementation of a much more rigorous structured exploration process, we now have a quality portfolio of targets tested, while new generative studies will lead to a constant supply of new targets.

Our exploration budget for 2017 is $100 million, which allows us to advance our targets through the resource triangle. This budget with a collaborative effort the site teams focus their exploration program to maximize the value. When we make a discovery that meets Goldcorp strategic and economic filters, we have the ability to motivate for additional dollars.

Let's talk and Dave mentioned earlier, one of Exploration's key strategic objectives is to organically increase the reserve base by 24/7. We see that increase coming from the continued drilling along with the strike, as well as down currently by current deposits. The conversation, he conversion of resources at the new Century Project as well as the [Ecotel] technology projects that are being undertaken of both Peñasquito and Pueblo, and finally exploration success across our portfolio of targets.

I will now provide you with an update on key highlights from our exploration programs underway and results we have seen so far. For further details, please refer to the exploration press release we issued yesterday.

Starting of Cerro Negro, this is one of our most respected districts where we currently have a portfolio of 32 targets. Our drilling during 2016 returns positive results from a number of our targets including the Mariana Este B, San Marcos, Emilia and Eureka vein system, and in 2017 we will continue to follow up for reserve conversion and reserve growth.

During the fourth quarter of 2016, we commenced drilling on our newest target, Silica Cap which showcases 3.6 kilometers from the front side. The target is a northwest trending zone of silica and argillic alteration which extends over approximately 1.2 kilometers in straight length. It's 50 to 150 meters wide and is coincident with the major topographic Ohio. Silica Cap located adjacent to the Bajo Negro which is close to 1 million ounces of resources and vein zone.

To-date, three scout drill holes have been completed and intersected with varying widths of colloform band, as well as vuggy and breccias silica veining, which have returned some very strong and encouraging results. Drilling continues with step-out planned at 50, 100 and 300 meter centers. It's a priority target going into this year where we see significant potential for resource growth.

We have also started drilling on our next target in line, [indiscernible] and have recently signed a contract to fly an airborne electromagnetic survey over the entire property to provide an additional layer of data to prioritize the pipeline of targets as well as generate new targets from this highly perspective discipline.

Moving to Éléonore, it's one of our newest camps with a large underexplored land packages. There is quite significant potential to expand the reserves and resources, exploration has historically been focused on extensions of no mineralization of Roberto deposit, which is now being traced to vertical debts of 1,500 meters and it's open down plunge.

While we are continue to focus on the geological model of the deposit and replace [indiscernible] mine. We have commenced surface exploration on two targets, Synee and Old Camp. Synee is located 7 kilometers from the plant site with initially identified the sampling of our information boulders within, which return some very significant gold assay results. Is a marshy area with little outcrop and in order to provide much need geological and structural information, the ground magnetic surveys was completed in the fourth quarter.

The results indicate tight-fold associated with the magnetically rich rock, together with cross cutting structures and two sense of magnetic destruction and alternation. The drill rig is being mobilized to the area and start scout drilling in early March.

In the meantime, drilling commenced that the Old Camp target testing a sheer hosted gold and – testing sheer hosted gold and copper mineralization which is hosted without our die-right intrusion.

Moving to the Roberto deposit, the 494 area was a priority underground exploration target during the latter part of 2016. One drill was active in the lower 494 area, which is approximately 950 meters below the surface, and we were focused in an area south of a historical intercept which returned 20 grams per tonne over 8 meters. Drilling successfully intersected the zone and supports the latest geological model. But we've had some very positive recent results, 50 grams over 2.6 meters, 19 grams over 5.3 meters, 4.5 grams over 6 meters and almost 10 grams over 2.6 meters. This is providing additional opportunity within the deposit.

Furthermore, one depot was also intersected another zone behind 494 which has returned just over 4 grams over 2.6 meters, again offering additional opportunity within net deposit. And as you will see from the slide, the 494 area was also targeted at higher elevations and the recent hole returned 19.6 grams over 6 meters.

All of this drilling information is currently being integrated, update the geological model and position follow-up holes in these priority areas.

Moving to Timmins, that's one of the world's most prolific gold belts with over 75 million ounces produced from the Porcupine camp itself. It is an exciting district. Shown on the slide are a number of targets including oil Hoyle Pond, Century, Coniaurum and Owl Creek, which the current focus of drilling, as well as progressing these targets, we have embarked on a district scale prospectivity analysis which involves the integration of numerous data sets to ensure we maintain a constant supply of targets for testing.

Now to Coffee. Since the acquisition of the Coffee project in July 2016, we doubled the exploration budget and undertook and aggressive drill program up to the winter closure at the beginning of November. This is a highly prospective piece of real estate covering some 60,000 hectares and over 50 kilometers of straight length. Only 30% of the area is covered with gold soil geochemistry. But where it is being completed, it has returned highly anomalous results an outside of the known drill areas, there are over 12 kilometers of untested gold in in soil anomalism to be valuated, further attesting to the prospectivity of this land package.

Drill intersections displayed on next slide gives you are summary of the work we have completed since the transaction. With a budget of $8 million in 2017, we are staffed up and the drills are ready to hit the ground running on the 1st of March to follow-up on these exciting targets and after the resource base.

Melanie, we would now like to pass back to you for questions.

Question-and-Answer Session

Operator

[Operator Instructions].The first question is from Andrew Quail of Goldman Sachs

Andrew Quail

Hi, Dave and team, thanks very much for hosting the call and taking my question. Just a couple of quick ones, is Cochenour at all part of the five year guidance, even when we look at sort of post 2020?

Todd White

Hi Andrew, this is Todd. No, Cochenour is not part of the five-year guidance that we've given you at this point.

Andrew Quail

Right. And as far as near term, last year you obviously had a couple of quarters that were – two quarters were very strong and one was a little bit weaker. If you sort of see this year maybe more consistent quarter-by-quarter as we model these – as we model your year?

Todd White

I think what you would look at this year is, we'd see slightly stronger quarters in the first and second, and then as we see Peñasquito come down in grade as expected due to that stockpile feed, we will see somewhat lower third and fourth quarter, but in general they are in a relatively tight range that there should be no major variance, little higher in the first half, little lower in the second half.

Andrew Quail

Right. And then, Dave, one for you, just you talked about going net for share, which I understand that strategy, can you just comment how something like M&A would focus or fit into that strategy at all?

David Garofalo

Sure. I mean whether we're allocating capital internally or externally, we expect that capital to generate returns in excess of our hurdle rates. And we build an appropriate risk premium on top of our risk free cost of capital before we send dollars into internal or external opportunity. So, we look at things whether the internal external through the same economic lens.

On the M&A side, you know by and large we've been focused on cultivating the pipeline or firm system of junior explorers that hopefully will deliver projects down the road that we can populate our own pipeline with.

Andrew Quail

Okay. Thanks very much.

Operator

Thank you. The following question is from [indiscernible] of Morgan Stanley. Please go ahead.

Piyush Sood

Hi guys, this is Piyush Sood filling in for Evan Kurtz. I have two questions. First one, in the last quarter, the Company generated about $100 million in the earnings and about $200 million in operating cash flow. If I take out working capital release, So, just want to understand if there were any one-time items that moved cash inflation one way or the other given that level of earning. So, asked another way, is $200 million, the level of cash we should expect on a go-forward basis, if earnings are around $100 million.

Russell Ball

Yeah, this is Russ. A couple of issues, we didn't withhold that $60 million with the payments, that traditionally in the fourth quarter we've rolled over, so that was accelerated into the fourth quarter. We also ended up with concentrated inventory of about $60 million to $70 million, so that was another piece, but we also had some slightly higher working capital payments for taxes. And so when you look at it, $200 million is probably on the lighter end given some of those changes in working capital in the fourth quarter.

Piyush Sood

Thanks for the color. And then, one more question, you started to make good progress on your $250 million efficiency target, would it be possible to somehow allocate that target into buckets like cost saving, CapEx savings, revenue optimization, anything like that on those lines?

Russell Ball

Certainly, and we can get you that data. Maybe what we'll do is add a slide to the next earnings call and we'll break it down, because you are right, there are number of buckets, part of it is cost reduction, but probably the biggest – undoubtedly the biggest is more around the value add from for example additional recovery SMI side. So, we'll do a better job of explaining exactly which buckets and that should hopefully help you guys model at your leisure.

Piyush Sood

Thanks guys. Thanks for the color.

Operator

The following question is from Greg Barnes of TD Securities. Please go ahead.

Greg Barnes

I'd just echo they would be very useful to have that bucket breakdown on the cost savings. My question is, actually around, when I look at the project pipeline slide in the deck, it looks like you are suggesting you get permitting done by Q3 2019 and then it moves into execution. Is that realistic in terms of making a production decision at that point or what are you trying to imply there?

Russell Ball

Greg, it's Russ, and I want Todd to jump in. we actually have a Steering Committee later today with our friends across the street at Teck. On high-level this project continues to progress very well. You know we're in the PFS and we should be done with that and enter fees by the end of the year. So, our recent acquisition of the Stream on the 4% gold up at El Morro gives you an indication of as you so speak of the direction this project is headed. Obviously once we get to a feasibility study and are able to put in front of those sponsors, project with a range and in economics around that, it's going to compete for capital as Dave said earlier not just internally without projects but also with Teck and for example Kibi 2.

So, if we assume no capital constraint, which is a wonderful world to be in, but not reality. We would progress along that schedule you've seen and I think that puts first production or commercial production in 2023 if memory serves. But again, we need to do the work, we need to then take it responses and see how the project straights and ranks against other than both of our portfolio. I feel very good about the progress the team we've assembled and look forward to updating you through the PFS and maybe Todd anything else from your perspective.

Todd White

No, I guess what I would just say is what I would take from that is the milestone of getting the permit package prepared in the process. At that point then we you know that's kind of the entry for that into our process of when we allocate capital, but the real milestone there is to complete the pre-feas and get the permitting package in and underway.

Greg Barnes

The permitting timeframe of the year does look quite short?

David Garofalo

Yeah, I mean, I'm just looking it up on NuevaUnión, I put those two boxes more together the grey and red with some overlap. We have focused on the engagement and are fairly far along with our EIA work and consultation process. That is that Todd said the critical task and the team is focused on that, in engineering, quite frankly a secondary. The schedule is going to be driven by our engagement at the community level and I'd say that is going extremely well. As we work together to bring this project to fruition.

Greg Barnes

Okay, great. That's very helpful. Thank you.

Operator

Thank you. The following question is from David Haughton of CIBC. Please go ahead.

David Haughton

Yes. Hi Dave, Todd, Paul and Russ, thank you for the update. Just looking at the slides that Paul had put up and in particular I think you've got Porcupine. I am wondering to what extent you'll re-think about Dome Century has changed the way that you are looking at exploring around Porcupine. Wondering whether you're looking for ore bodies that could be a future feed or satellite feed for the larger mill if it was to proceed and if it is changing the way that you're looking at that area?

David Garofalo

Hi, David. Basically, we are putting orders less together. I mean there hasn't really been relooked at for the past 10 years and it's about maximizing the new infrastructure that's going to go into Timmins for the Century project. And therefore, we were looking at both open pit potential as well as higher grade optionality from underground targets as well.

David Haughton

And as a result of you know as I think of Dome Century, which is really being in our minds for the last nine months also. Has they've changed the exploration effort or the dollar is committed to the area?

David Garofalo

No, not at all. We believe it's highly perspective, as I say is one of the world's most prolific camps, I believe there is a lot of prospectivity in there when I look at the geology information that I've looked in over the last six months. And again, we've got a quality profile right across the group and each side is competitive for the dollars and the money will go to where we are getting the best results.

David Haughton

Okay. And also on the exploration strategy side of things, looking around Éléonore, revisiting some of these ore bodies and it looks like you're getting some pretty impressive hits here. I am just wondering what you're thinking is, is it going to be potential satellites ultimately for Éléonore infrastructure or you're hoping for standalone, what kind of thing you're targeting?

Paul Harbidge

I mean, firstly, the true results that we presented from within most, additional zones within the deposit, so they will add incremental ounces to the reserve. And then, also one of the things I noticed was we've been very focused solely on the deposit, the reserve deposit in terms of chasing it down plunge and we hadn't looked at any of that satellite targets. So, it's the case of zooming out and putting the day to last together, we've got three targets. First was outcome, we've started to drill on, and then as you've seen from that geophysical image, we're busy mobilizing drill rigs over there. So we're looking to be able to provide additional ore sources from satellite deposits as well as expanding the current resource and reserves within the deposit itself.

Russell Ball

Dave, its Russ. Just maybe adding, we have a 7,000 tonne a day mill and it will run at 8,000 if we can smell it. The challenge will be to fill in and feeder structures will feed the target are key part of the process to drive NAV there. We have plot that's hungry and the challenge of the charge at least for all is to go and find something near surface that we can use to fill that plot. That is the quickest way to drive NAV up at Éléonore.

David Haughton

Okay. Thanks Russ and Thanks Paul.

Operator

Thank you. The following question is from Mike Parkin of Desjardins. Please go ahead.

Mike Parkin

Hi guys. Thanks for taking my call. Just a question on Cerro Negro, can you give – it's a been much of an improvement in terms of working with the work force down there, obviously has been fair number of cuts and you mentioned in the past – recent past but there is a bit of kind of a restructuring process in getting back to targeted rates. Can you just comment on how that's going, now that's been a better month since your Investor Day?.

Todd White

Yeah. This is Todd. I was actually just down there couple of three weeks ago and you know what I would say is, certainly there was some disruption there. I think the sense that I got on the site in interacting with some of the folks is, you know I think it's stabilized and what I saw on site was with high morale within the workforce. We're seeing that workforce rally around getting back to production rates that we were at prior to the restructuring so in general look I believe that part is behind us. I believe the workforce is rallied around the future there and I am always really pleased with what I saw.

David Haughton

Great. Okay. That's it from me. Thanks guys.

Operator

Thank you. The following question is from Steven Butler of GMP Securities. Please go ahead.

Steven Butler

Good afternoon, guys. Todd, just to follow-up there on Cerro Negro respecting your thoughts, the throughput stuff a bit in fourth quarter relative to the third quarter, so could you maybe comment on were there again workforce or labor disruption issues in the fourth quarter that or is rough as Q3 or are you at a TS entering point here? And what's the throughput look like in the month of January if you can comment at all?

Todd White

So, I think really the fourth quarter you know the lower throughput again I think was maybe a bit of a hangover from those disruptions. It was pretty severe in terms of complete work stoppage as it took a bit of time to get the crews back in place and up and running and get back to those production rates. So, just looking at it, I would say that we have trended back towards where we were prior to the reduction of the workforce restructuring. Q1 we're seeing roughly 2,300, 2,400 ton a day out of the mines and that's on pace with where we need to be. So, things are looking stable on the right trajectory there.

Steven Butler

Okay. And Todd, you mentioned earlier, 3,000 ton per day would be sort of your expected average for the year, is that right?

Todd White

Yeah, that's correct. We're on pace right now and we expect to see that climb over the course of the year and we end up somewhere a little bit higher than 3,000, but in general it's a 3,000 average for the year.

Steven Butler

Okay. Thank you. Paul, quickly with you on terms of Cerro Negro, the Silica Cap drilling, what's your plan in terms of drilling there? I mean, obviously it success the results dependent, but if you could drill it adequately sure, how much was the plan to drill the Silica Cap target, number of holes, et cetera?

Paul Harbidge

I mean, as you say its hole dependent, so it's a case of a first part. I mean, I'd say I am looking to be able to basically provides the coat hangers in which to hang the geology structure, alteration, the mineralization over that kilometer. And I'd look at doing the scout drilling on 200-meter centers along that kilometer. We can generally speak when you look at these vein systems in Cerro Negro, they are between 500 and a kilometer in lengths, they're probably about 250 to 500 meters in depth, and they're 10 to 15 meters in width.

So that's a sort of geometry that I am looking at and ways between 5 and 10 holes in initial phase then depending on the results which would go from there. And then it's about also testing the next pipeline of targets down there, and as I mentioned we've already studied on [indiscernible] and I want to get this airborne geophysics done as well to provide another layer to help to prioritize this pipeline and also generate new target down at Cerro Negro.

Steven Butler

Okay. Thanks guys and good luck. Thank you.

Operator

The following question is from Christopher Terry of Deutsche Bank.

Christopher Terry

Hi guys. Two questions from me. Just in terms of the operations, I know you talked a little bit about the quarterly performance in one of the earlier questions, expected over 2017 on the gold side. Can you just talk a little bit about the base metals, given its reasonably material for the business particularly around Peñasquito, just what we should expect maybe on a first half second half basis?

Todd White

I think in terms of the base metals there, it will be a very similar trend to the gold where we would see stronger first half and a relatively weaker second half. So, essentially again, it will follow the gold production.

Christopher Terry

Thanks for that. And then just in terms of your cash flow statement, I think you talked about a little bit earlier with some of the $60 mil rollover, some taxes and inventory movement. Just notices against their numbers, the net debt position was a little bit higher, so just looking at the actual cash conversion, and then I guess analyzing, the 2015 to 2016 and looking at the generation of the business and appreciating you did pay some debt back during the year, but the actual cash balance has still gone backwards. As we shape up into 2017 with CapEx going up, how do you think about free cash flow generation? I know you are very focused on NAV per share, but you know the performance of last year didn't suggest free cash flow generation. So how do you look at working capital and the different items on the cash flow statement into 2017?

Russell Ball

Sure. Chris, its Russ. I'm happy to squeeze the cash balance as slow as I can and we have a big method [ph] onboard here to rationalize and minimize working capital, which at the end of the day is kind of free money if you can squeeze it out of the system. As you noted, we pay down about $330 in debt including our share of the Pueblo Viejo debt last year. Our plan over 2017 and 2018 is to reinvest in the projects that have been approved primarily Pyrite Leach which is that $420 million at Peñasquito and for wide material handling of around $90 million. The bulk of that spend is 2017 and 2018. So, we generate operating cash flow, invest in that to pay the dividend and essentially delever the balance sheet and other $500 million.

Our long-term goal is net debt to EBITDA below 1, which the metals prices are going to move those numbers around, but on our numbers if we – when we pay that $500 million back, we have a note due in March 18. We intend to pay that back close to refinance, will have achieved our long-term target of less than 1 net debt to EBITDA.

So, think about the next two years as reinvesting in the business, particularly those two project of around $500 million to $550 million, debt reduction of about $500 million and dividend around the same is where we are. And then what we see is cost come down and production ramp based on that five-year plan, free cash generation is significant in the following three years of that five year window we gave you and you guys can run the math, but it's to the current spot price is it's more than a $1 billion off the capital. So, two year we're reinvesting, deleverating and then three years of significant harvest as cost comedown, production goes up.

Christopher Terry

Thank Russ. I men I could appreciate the longer term, just sort of focusing on the 2017, 2018, so good to hear you work for the math. Thanks.

Operator

The following question is from Michael Jalonen of Bank of America Merrill Lynch

Michael Jalonen

Russ, just had a questions, sorry on the Barrick call today, Catherine Raw said with respect to your question on PV, the tax rate is as you know the old three year agreement with the government, I guess putting the tax to 50/50 ended December 31 and Catherine has said that negotiations are underway for the new tax rate, which she said will be another three year agreement, but she kind of gave the impression it might be the same as before, just wondered if you had any comment on that?

Russell Ball

Mike. Yeah, the duty of Catherine in her new role and me in my new role is we get to spend a lot of time talking about issues of mutual interest and it's a great working with here on PV and in particular [indiscernible] doing on that where the discussions are and I say exactly what she says, Mike.

Michael Jalonen

Okay I missed part of your answer because a cellphone went off. So…

Russell Ball

I'll just summarize Mike. Catherine kept me informed as to where they are, the status and their answer is exactly the same one I'd give. As soon as we know, we'll give it to you.

Michael Jalonen

No timing at this point?

Russell Ball

If Catherine not prepared to give any accounting Mike, I promise I won't.

Michael Jalonen

Okay, thanks Russ.

Operator

The following question is from Anita Soni of Credit Suisse. Please go ahead.

Anita Soni

Hi, good morning or sorry good afternoon guys. Just a quick question on Éléonore and the unit cost there? In the fourth quarter, I guess you were tying in circuit there, I think it was – but just wondering how the unit cost will evolve over the course of the year?

Todd White

Yeah, this is Todd. This is – I've mentioned again our unit cost are going down year-over-year, what we do see is you know, we do see that on the all-in perspective affected by our capital spend on the tailings as well as the waste pads, but from a unit cost perspective again, as we get that mine back, up to speed, up to the 7,000 tonne a day, we expect those unit costs to be very much lower than they are today.

Anita Soni

I guess this fourth quarter was a bit of a disruption I guess, and I'm just trying to get an understanding about, you know Bullet, is it going to be in the result in the first quarter or is that something that's going to take time as it ramps up?

Todd White

Yeah. I think it's really tied to the rate of the ramp up.

Operator

The following question is from John Tumazos of John Tumazos Very Independent Research. Please go ahead.

John Tumazos

In terms of the tonnes per day development or mining productivity at Éléonore, Cerro Negro, all the phases haven't started at Éléonore. At Cerro Negro you are moving from your Eureka into Mariana. So the mines are changing. What year do you think is the year where either mine would be normal and up to strength, speed 2019, 2020?

Todd White

I guess maybe just, I heard some of your question there, but – so what I would say is, we are mining out of Mariana Central as well as the Eureka mines at Cerro Negro. Mariana Norte which is separate from Central is currently under development and we expect that to be in product in 2018 at which point we are then mining the three separate mines, three separate portals. That's really the key to hitting the 4,000 tonne a day mining rate that we expect there. So, in terms of the year as you ask, I think, as I understand your question, 2018 is when we see those mines all-in steady state production.

Operator

The following question is from Yuriy Vlasov of Berenberg. Please go ahead.

Yuriy Vlasov

Yeah, good evening gentlemen, it's Yuriy Vlasov from Berenberg in London. Two questions, regarding our new Coffee project, do you any estimation, how much capital you will have to invest in this project before it ramps up to the full capacity? And the second question is again on CapEx more broader scale. Within the next two years, do you have any number on your CapEx or an indication whether it's going to be higher or lower versus 2016 results?

Todd White

So, yeah, this is Todd. Based on you know relative to Coffee, you know again we've been out there with $285 million is what we see as our build-out on the coffee project now. In addition to the build-out cost, there's some few other cost and they are related to permitting as well as some of our First Nations work which takes the total to roughly $300 million. And then that gets the mine-up and running.

Yuriy Vlasov

Okay. And on your total CapEx going forward for the next 24 months is an indication where it's going to be higher or lower, or please direct me to any slide if I missed anything?

Russell Ball

So, Yuri, its Russ. A couple of things, think of sustaining capital for us is somewhere around $225 an ounce to $250. It varies depending on the year and the project. And then top of that what we have in the plan right now and we provided the numbers, I think at the Analyst Day was on Pyrite Leach which is expansionary project of around $420 million essentially over the next 2.5 years. And must provide material handling of 90 – over the next couple of years as the project over and above that, and then depending on the start day for construction is when we'll start to spend the money you alluded to earlier on Coffee. Right now the schedule shows us producing first gold at the end of 2020 or early in 2021.

Yuriy Vlasov

Okay. All very clear. Many thanks, gentlemen.

Operator

Thank you. There are no further questions registered at this time. I would now like to turn the meeting – please go ahead.

David Garofalo

Thank you, operator. And thank everybody for your kind attendance. Of course management remains open for any questions you might have and follow-up. Thanks.

Operator

Thank you. The conference has now ended. Please disconnect your lines at this time. We thank you for your participation.

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