Klondex Mines' (KLDX) CEO Paul Huet on Q4 2016 Results - Earnings Call Transcript

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Klondex Mines Ltd. (NYSEMKT:KLDX) Q4 2016 Earnings Conference Call March 24, 2017 10:30 AM ET


John Seaberg - SVP, IR

Paul Huet - President & CEO

Mike Doolin - COO

Brian Morris - SVP, Exploration

Barry Dahl - CFO

John Antwi - SVP, Strategic Development


Rahul Paul - Canaccord Genuity

Heiko Ihle - Rodman & Renshaw

Jeff Killeen - CIBC

Josh Wolfson - Eight Capital Partners

Sam Crittenden - RBC Capital Markets

Ralph Aldis - U.S. Global Investors


Welcome to the Klondex Mines' Fourth Quarter 2016 Earnings Conference Call.

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]

At this time, I would like to turn the call over to John Seaberg, Senior Vice President of Investor Relations and Corporate Development. Please go ahead John.

John Seaberg

Thank you, operator. Good morning and welcome to the Klondex Mines fourth quarter and full year 2016 earnings call. Joining me today, are the other members of our executive team, including Paul Huet, President and Chief Executive Officer, Mike Doolin, Chief Operating Officer; Brian Morris, Senior Vice President, Exploration; Barry Dahl, Chief Financial Officer and John Antwi, Senior Vice President, Strategic Development.

Please note, that a corresponding presentation, related press release and detailed financial schedules are available on the Klondex Mines Investor Relations website.

Turning to the cautionary language on Slide 2, I want to remind listeners that during this call, we may make certain forward-looking statements, which are subject to a number of risks and uncertainties that may differ materially from our actual results. Please refer to the section on forward-looking information in the Company’s latest 2016 annual report on Form 10-K, which includes our consolidated financial statements and related MD&A and other filings, which are available on our website, on SEDAR and on EDGAR.

With that, I will turn the call over to Paul Huet.

Paul Huet

Thanks John. Good morning, everyone. I want to start today by thanking everyone for your patience and understanding with our decision to reschedule the filing of our 10-K, press release and this conference call.

As previously announced, we just completed our transition from IFRS to US GAAP, which Barry will speak to in greater detail later on this call. I would like to emphasize that our decision to reschedule the call was purely made to allow our accounting team additional time to finalize the necessary adjustments that this transition required.

As most of you can imagine, this was an extensive task and I would like to commend Barry and his team for their efforts in getting this conversion across the finish line. With that being said, I am now pleased to provide you with our fiscal 2016 fourth quarter and full year results as well as an update on our current operations.

We will begin our call today on Slide 4. There is absolutely no doubt that 2016 was a phenomenal year for Klondex and our shareholders. I am so proud of what we accomplished and I want to start the call today by thanking my entire team, our contractors and our Board of Directors for their ongoing support.

First of all, and I know I say this every quarter, but it's because health and safety are core values here at Klondex. I am so very proud to say that once again we remain lost time injury free, lost time injury free at all of our mines. It is extremely important to us that all of our employees and contractors return home safely to their families each and every day.

As you can appreciate this is not an easy task. It takes tremendous focus and the right culture to achieve the safety milestones that we have accomplished. As President and CEO of Klondex, I am very proud of my team for making safety a priority each and every day.

We also continue to deliver on our commitments. One of the many things that separates Klondex from our competitors is our focus on doing what we said we would do. This has become a core value to me and my team, which we live by each and every day.

Today Klondex is in a growth mode. We are fortunate to have been presented two unique acquisition opportunities over the last year, which we have successfully taken advantage of. It wasn't that long ago when I became CEO of Klondex that we only had one project in Nevada.

As many of you will recall, this was Fire Creek and we didn't even have a mill. Our company looks a lot different from that company today. In 2016, we accomplished what others have wanted to do for more than two decades, in fact I was part of two other companies trying to accomplish what we finally accomplished, but what we did is finally consolidated three flagship mines in Northern Nevada; Midas, Fire Creek and Hollister, giving us one of the greatest land packages in Nevada and we continue to ramp up True North in Canada.

Klondex now has four mines, two fully functional mills in two different countries. For Klondex, this is just the beginning of our journey of becoming a mid-tier gold producer. From this point on, we need to continue to deliver and execute on our plans.

In 2016, we had the highest amount of production in the company's history at just over 160,000 gold equivalent ounces, which Mike will speak to later in our presentation.

This was an increase of approximately 26% from 2015 and we expect to continue this growth in 2017 by producing 220,000 gold equivalent ounces. That's up another 36% from the previous year. At the same time our production is increasing. I am very pleased to say that we are also growing our mineral resource and extending our mine life. This is not an easy thing to do in my opinion.

We are also -- we also continue to maintain a very healthy balance sheet. We focus on running our company as a business. We have a flexible capital allocation strategy that incorporates the current metal prices into our spending. When we have additional financial capacity from higher metal prices, we will invest more capital into our operations as we believe that generates the highest return for all our shareholders, putting our dollars back into some of the best properties in North America.

Turning to Slide 5, this is an illustration of the Klondex portfolio. You can see our three mines and their proximity to one another in Northern Nevada. We now control 103 square miles in one of the best gold jurisdictions in the world. Three mines feeding one central mill, providing significant synergies and operational flexibility to our company.

We also have an important asset in Manitoba, True North. This is our portfolio today. We have extensive exploration upside at all of our operations and with this portfolio of assets, we are focused on organic growth.

Turning to Slide 6, on the left, you can see just how rapidly our company has grown over the last five years. In 2013, we produced approximately 8,000 gold equivalent ounces from Fire Creek and just as a reminder, we didn't have a mill. We were toll milling with new one at that time at Midas.

In 2017, we expect to produce approximately 220,000 gold equivalent ounces from our four mines and two operating mills. Here's what's impressive about the entire situation. On the right side of the slide, you can see that while we've been increasing our production, we also been adding to our resource base and extending our mine life rather than depleting them.

With that, I will now turn the call over to our Chief Operating Officer, Mike Doolin.

Mike Doolin

Thanks Paul. Moving to the fourth quarter operational highlights on Slide 8, I won't touch much on this slide as most of this information has already been pre-released.

We had a great fourth quarter as we benefited from all of the development work performed earlier in the year. In Nevada, the ore tons mined and the mill head grade both increased throughout the year. At True North, we continue to ramp up on the production.

Looking at the operating results for the full year on Slide 9, I just want to emphasize that Nevada continues to be the cornerstone of the company and our goal of filling the Midas mill continues to be a major priority. We're fortunate now to have the Hollister mine, which will help us deliver on this goal.

The Nevada operations performed as expected and I am pleased to report that we have once again achieved our annual production and cost guidance as mine sequencing and ore development activities performed throughout the year contributed to quarter-over-quarter grade increases.

We entered the year producing just over 150,000 gold equivalent ounces in Nevada at a cash cost per gold equivalent ounce sold of $637, both in line with the original guidance given for our Nevada operations. At True North, we produced just over 10,000 gold equivalent ounces, which is also in line with our original production guidance.

Production started in the third quarter as we started reprocessing the tailings and increased in the fourth quarter as we began to process stockpile ore. Just a reminder to everybody, that even though we provided the production guidance, we didn't provide a cost guidance at True North for 2016 as we were in the start-up mode.

Turning to Slide 10, as previously announced, we expect to produce between 210,000 at 225,000 gold equivalent ounces in 2017. Our production costs are estimated to be between $680 and $710 per gold equivalent ounce sold. Production at Fire Creek and Midas is expected to be pretty consistent with the prior year, while we expect higher production both at True North and the Hollister mine to contribute to the majority of the growth in 2017.

As we always talk about, we manage our operations on an annual basis and commit to achieving our annual guidance. Similar to last year, we expect our 2017 production to be weighted toward the second half of the year. We expect our first quarter production actually to be the lowest of the year and will remain on track to meet our annual production guidance.

In Nevada, first quarter's production has been impacted by a plan mill maintenance at Midas and the inclement weather as we have experienced some serious snowfall this year in Nevada. As we worked on the mill, we continue to mine as planned and have built a substantial stockpile at Midas, which will be processed over the next few months.

At True North, the mill was down part of January for a planned cleanout. We also experienced lower than expected underground equipment availabilities. As of now, all the major repairs have been completed and we remain on track to deliver our production and cost guidance for the full year.

Our 2017 capital expenditures are expected to be between $57 million and $62 million with an additional $3 million to $5 million spent on regional exploration. The majority of our capital is expected to be spent at Fire Creek as we continue underground expansion in the form of primary access development and advancement of the second portal.

We also expect to spend between $7 million and $9 million at Hollister as we commence a bulk sample mining program and underground definition drilling in the Gloria zone. As Paul mentioned, this is a base case capital budget and assumes a gold price of $1150 per ounce. As we realize higher metal prices, we have the flexibility to increase our capital expenditures.

With that, I'll now turn the call over to Brian Morris.

Brian Morris

Thanks Mike. Turning to Slide 12, at a high level our exploration program has been very active, primary at Fire Creek and True North. Our underground drilling program at Fire Creek has been successful in extending the current vein systems to the North and delineating wider mineralized zones while our surface drill program is contesting regional exploration targets identified using geophysics.

Quarter underground is surface drill programs that return some very positive results. At True North, our exploration program has been testing the up and downs of extensions of the 710 and 711 zones, while testing for down dip extension of the 007 structure 2,000 feet to the east of the current underground development.

Turning to the plan view Fire Creek on Slide 13, you can see we've had some significant high grade intercepts on the Joyce and Vonnie veins with grade as high as one of 96 ounces per ton or 1.7 feet. What was even more interesting is what we're carrying to the North.

We are seeing significantly wider zones of mineralization up to 24 to 52 feet west is all of very good grades. Data suggest that many of these veins converge as we move to the north, creating larger mineralized zones, which gives us possible opportunities using larger gold-mining techniques.

Turning to Slide 14, this geophysical map -- this is a geophysical map of our Fire Creek land and you can see that we have tested three of the geophysical anomalies on the property and all three hit mineralization, but what's important takeaway from this map is the red ovals that you see on the map. So right similar untested geophysical anomalies in our district.

You see we have numerous untested targets to the north, the east and to the South. The geophysics continues to be an accurate predictive tool. We can have a system at Fire Creek much larger than what we understand today.

Turning to the cross-sectional on Slide 15, this cross-section is just further support from the previous slide. You can see the Fire Creek mine in red in the center of the slide. From the farthest furthest west intercept to the farthest east intercept is a distance of approximately 6,000 feet making us reevaluate the districtwide potential.

Turning to True North on Slide 16, as previously announced the recent drilling has been very positive. The team's exploration model and understanding the local vein systems have already led Klondex significant new discoveries and unaccounted extension of the 007 structure into the historic sand unit 2,000 feet to the east of the current development. The new discovery continues to suggest that True North District remains underexplored and has the potential to significantly expand the mineralized system in the district.

Moreover, normally continuing to extend the mineralization up and down on 710 and 711 zones, these drill results support our belief the system remains robust and is also open at depth. We expect to provide an updated mineral resource estimate for True North in the near future. We also expect to issue a technical report for the Gloria zone at the Hollister mine late in the second quarter.

I will now turn the call over to Barry.

Barry Dahl

Thank you, Brian. Turning to Slide 18, before getting into the details of our financial performance, I wanted to comment on the conversion from IFRS to U.S. GAAP that we just completed. As I mentioned in our Q3 2016 conference call, due to the fact that more than 50% of our U.S. shareholders are U.S. based, we are longer -- we no longer qualify as a foreign private issuer.

Consequently, effective January 01, 2017, we were required to transition to domestic company status and adopt SEC reporting as such, including adopting U.S. GAAP for financial reporting for our year ended 2016 and restating historical financial data.

As Paul mentioned in our introduction, this was a significant event and I would like to first acknowledge the tremendous effort our accounting team put forth in order to complete this transition and I would like to thank them for their hard work.

Secondly, I would like to point out that this transition from IFRS U.S. GAAP has resulted in some changes and how we account for certain transactions. For example, exploration expenses of $12.8 million and development and project expenses of $9 million were expense under U.S. GAAP instead of being capitalized as they were under IFRS.

Additionally, mineral properties, development and exploration capitalization and DD&A under U.S. GAAP is based on proven and probable reserves, compared to MI& I resources under IFRS, which in our case increased the per ounce amounts on units of production dependent assets. These IFRS to U.S. GAAP adjustment obviously had a significant impact on our reported net income and net income per share.

Revenue for 2016 was $198 million up 29% from last year and a record for the company. Our income from operations was approximately $15 million and we reported a net loss of $1.7 million or $0.01 per share. Our average realized gold price and silver price for the year were $1,245 and approximately $17 per ounce respectively. We incurred capital expenditures of approximately $62 million, largely in line with our guidance.

On Slide 19, you'll see that Klondex generated net operating cash flows totaling $45 million, which were also impacted by the previously mentioned IFRS to U.S. GAAP conversion. As of the end of 2016, Klondex had total liquidity of approximately $97 million, consisting of $48 million in cash, $28 million of metal inventory and $23 million undrawn credit facility.

I will now turn the call back over to Paul.

Paul Huet

Thanks Barry. In closing, 2016 was an incredible steppingstone for Klondex. Our team executed on our mine plans as expected and we delivered solid operating and financial results. Most importantly, we continued to work in a safe and socially responsible manner with zero lost time incidence or environmental citations at any of our operations, while generating some very healthy returns for our shareholders.

Let's face, 2016 is behind us. We are focused on our future and 2017 we have to continue to deliver on what we said we would do. Our people must go home safely every day. We must respect the environment and treat our key external stakeholders as our partners and members of the Klondex family because they truly are. We have added two new assets into our portfolio and now must prove we can successfully operate these mines in a safe and profitable manner.

Organic growth is our near-term strategy. You will hear us say this throughout 2017 many times, what's our focus organic growth, we have the platforms and the mines to grow our company and we will do so from within. We have the people, the talent and the assets to continue our journey of becoming a world-class mid-tier gold mining company.

Thank you for your time and with that, I would like to open the call up to questions.

Question-and-Answer Session


We'll now begin the question-and-answer session. [Operator instructions] The first question comes from Rahul Paul with Canaccord Genuity. Please go ahead.

Rahul Paul

Hi everyone. It's obviously a very transformational year for you guys. Just one question on the tailings capacity at Midas, now Hollister contributing to feed as well, you're obviously operating it closer to capacity than before. At what point would you run out of room on the current TSX and at what point would you need to build another one and where do you stand with respect to permitting and [answer] for new TSX.

Paul Huet

Thanks Rahul. It's Paul and I'll start the response and then I might turn it over to Mike to maybe add a bit more color, but the reality is we have been saying for many years now our number one priority in Nevada has been to fill the mill, but we have had plans on filling the mill whether it came from Hollister, whether it came from Fire Creek or whether it came from Midas.

So, we'd anticipated this growth and we modeled this out sooner than the actual reality. So, for us, we successfully permitted a tail thickener last year, which would help create a lot of extra capacity within that existing tail then allowing us to go to 2019 or even greater depending on how successful this is and this is something we're going to continue to do even with the new tails because the tail thickener really allows us to extend the life of any [tailings].

But I think the short answer Rahul is the new tail thickener brings us into 2019 easily even with the Hollister ore at this point, but we have begun all the work already to do the engineering work and any baseline assessment to start the new tails down facility. Mike, do you want to add any color to that or is that pretty much capture it.

Mike Doolin

Yes Paul, this is Mike. That captures the majority of it. We're in the process this year of permitting a new tailings facility. Expectations are that construction will be complete by the end of 2018.

Rahul Paul

Okay. That's helpful. Thanks guys. That's all that I had.

Paul Huet

Thanks Rahul.


Next question is from Heiko Ihle from Rodman & Renshaw. Please go ahead.

Heiko Ihle

Hey guys. Good morning. Congratulations on the quarter and on finally getting True North and Hollister and Aurora and all that good stuff and most importantly well done on doing it safely here. Going to True North, you're predicting 41,000 to 45,000 ounces at cash cost that are quite a bit lower than what I thought of $725 to $750, we almost for 2016 is not a benchmark figure, but 2017 is still sort of a ramp year.

So just if you could walk me through some of the cost assumptions, the labor cost inflation all that stuff that you're using to get to the $725 to $750 please.

Paul Huet

Yes, thanks for the question. Mike, if you want to take that one on from operations please.

Mike Doolin

Okay. Yes. This is Mike. Yes, we build our budget very much consistent with the matter that we do down here in Nevada. Any of the -- any different that we're looking at up there, we're going to take into account and what we're doing as far as labor rates, employment, man camp, how we transfer people in and out of the situation. So, we do it the same way we built the budget every day. No different.

Heiko Ihle

Fair enough. Fair enough.

Paul Huet

And I think I would like to add that we've been pretty successful in the previous years with coming within 95% or 105%. That 5% either weigh on our cost, I don't anticipate we're going to be struggling in Canada. I anticipate that the budget that Mike and his team have produced, we will deliver as we've done in the past.

Heiko Ihle

No. I was just impressed, I wasn’t questioning it. So, you expect $50 million to $60 million of CapEx at the site. Can you just break this down a little bit on what it's going to be spent I assume some new equipment and all vacant stuff part of it?

Paul Huet

Yes. So, when I think of the whole total CapEx for the year, it's at the top of my head there is very small amount allocated to equipment, but most of dollars are allocated specifically to waste development in our case and the drill bit. So, it's typically 60% of the dollars are waste development, 40% are exploration drilling and underground infill drilling and that use either really good model that we've been using year after year after year.

Now the allocation by site varies where True our Fire Creek asset would get the most capital and the other ones would get less, but that 60/40 is a really good number that we've been using year after year since we've begun.

Heiko Ihle

And then the last question, I'll get back in queue. I talked to quite a few buy side guys and they mentioned there is some M&A targets left out there. Of all the companies I follow, you guys have probably done the best job of adding mines to your asset base.

What are you seeing in the market given that you're really only dealing with high-grade targets both in availability and pricing developments? Should we be shocked to see you guys do something else this year.

Paul Huet

Look, let's face it. Since we started Klondex, the strategy has been the same strategy since day one. So, I don't think there's been many surprises when we acquired Hollister and Nevada. The only surprise that I think that we gave to the market was the $32 million purchase of True North in Canada.

Our focus has always been from day one try to synergize and consolidate Midas, Fire Creek and Hollister together feeding one central mill, taking advantage of the synergies between all the departments that we can use, taking advantage of our own experience with all these assets and really make a unique company.

So, our strategy had never derailed from that and again bringing in True North was such a unique opportunity at such a good price we bought it at such a depressed cycle. We were able to pay cash. So, it really changed the company by having multiple jurisdictions, but the truth is, at this point, it's about as my Chairman always says, it's about chopping wood in front of us.

There is a lot of work to do in front of ourselves. We've now consolidated what we wanted to do. We need to make sure we now take advantage of exploration in our own backyards and it's not difficult to see how this company can grow and progress and generate some very healthy returns from within. Organic growth will without doubt be our number one focus for sure.

Heiko Ihle

Yes. You guys have been doing amazing. Keep it up. Thank you very much.

Paul Huet

Thank you.


The next question is from Jeff Killeen with CIBC. Please go ahead.

Jeff Killeen

Hi. Good morning and thanks for your time today guys. Wanted to start it off with Hollister, just reading through the MD&A and as you pointed out, you're going to put out a tech report in the second half of this year. Just wondering would we see a resource update with that as well or just maybe outline what we'll see in that report?

Paul Huet

Yes, thanks Jeff and I'll start off on the answer and then maybe turn it over to rest of my team, but yes, the short answer is yes. We do anticipate there will be a resource. However, keep in mind that that resource will be limited to a very small area. It will only include the Gloria.

We will not have had time yet to start drilling in the Hatter Graben area now. We all know that the Gloria area as well provides a lot of great extensions to the Western and the main zone. The main zone produced 400,000 ounces at average rate of one ounce per ton. We're seeing some similar results in the Gloria.

That will be the only part of the resource that we are able to announce. We'll begin drilling the Hatter as soon as the weather permits. Most of you know that Nevada has been one of the 100 year events where we've had tens of feet of snow.

Right now, we can't get it drilled up in many areas. We've had to shut down our operations because of snowfalls. It's been unbelievable the storm and the floods that you've seen on the news in California. They've hit us just as bad up in Reno and in our mine operations. So, it's been a drastic year. So, as a result, we're not going to be able to start up drilling probably two months later than we normally would in the drilling season.

So, a long story shor, yes, we will have a resource update and it will only include the Gloria system. So please be patient until we can start drilling the Hatter Graben because that's the area obviously that we are very excited about as well.

Jeff Killeen

Okay. Great. That's helpful. And then thinking about the production profile, you didn't point out Midas, having a mill shut down in this quarter. Can you give us any more aggregate view on what the other assets are going to look like from a profile over the course of the year?

And two-part question and then do you expect, is there any type of maintenance shutdown expected at True North for the process facility?

Paul Huet

So, I think and maybe it was not maybe clear, but Mike did lead to the fact that we did have a shutdown at True North as well and those were both planned shut downs. We wanted to make sure that we -- our most important thing to do is not erect our reputation.

We wanted to deliver on our commitment, to deliver on what we said we do and we know that getting the preventive maintenance the large component maintenance change outs done earlier on in the year, ensure our success at the end of the year.

So, in both cases, we shut the mills down. We did some preventative maintenance, the major components that we did making sure that we don't have any hick-ups throughout the year. I think that pretty much answers it. Does it not?

Jeff Killeen

Yes. Fair enough. And then one step further Paul, in terms of the equipment availability at Midas, is that something that you factored in as well in terms of is there any reinvestment there with respect to the fleet for this year?

Paul Huet

So, yes, I think Mike touched on equipment availability, the hardest problems we had was really at True North. So, we struggled with some equipment availability and some remote controls because of the shaft and it's harder to send equipment down and split the equipment apart. That created us a bit more of a headache in the first quarter.

I think he also talked about that's something that's behind us. In the ramps at Midas, Fire Creek, and at Hollister, it's a little different. If we start struggling with equipment availability because we're in Nevada, it's not hard to pick up the phone and call a contractor and get a piece of equipment in and make it part of our fleet and then send it underground, just drive it down.

It's a little more difficult in the shop where you got to split it apart and it takes three weeks. It impacts the skipping schedule. It impacts everything else. Most of us all work in shafts, this is not new to us, but we take them into consideration.

So, at Midas, if we have some availability issues, we'll be dealing with it on our own and we'll get through them, that's for sure.

Jeff Killeen

Okay. Great. And then lastly for me, pardon me. With respect to the Aurora mill, you're thinking about toll milling opportunities. Is that something you think could materialize in 2017 or is that probably more a 2018 type of potential?

Paul Huet

Look anything is possible right. Having operated that mill before, we have a short list of areas that require some toll milling. I wouldn't say, it wouldn't surprise me if we were able to secure a contract in '17. We're already doing some work ahead of schedule in our mill to make sure that it could be ready.

And for the Hollister ore, the ore is slightly different. It creates carbon. So, we're able to strip our own carbon at Aurora, which would help save us a lot of money by sending our own concentrate there. So that's an opportunity for us that will be saving dollars from as we process that ore.

Jeff Killeen

Okay. Thank you. That's it for me.

Paul Huet

Thank you.


The next question is from Josh Wolfson with Eight Capital Partners. Please go ahead.

Josh Wolfson

Hey. Good morning, guys. Just wanted to ask a couple questions on the underground mining rates and cost at when you're tracking, where you plan to be for both True North and Fire Creek.

Paul Huet

So, sorry, Josh it's Paul here. I'm not sure I completely understand, but I think like Mike alluded to the budgets, look we have productivity rates built in our budgets. We run them through our schedules. Our productivity rates are rates that are not only of the industry standard, but they're standards that we've developed throughout our own careers in Nevada, in Canada.

So, we just apply those productivity rates to the different mining methods. Now if we have the opportunity of expanding that mining method and having a lot more long haul at one asset, then we implement that into our scheduler, into our forecast.

So, I'm pretty confident, I've had an opportunity to go through these productivity rates. So, one thing besides the resource models and the reserves that we scrutinize there very closely, the productivity rates are extremely important to us that we make sure they're numbers that we can achieve.

So, I am going to stick to this until Mike here under the bus here, but we've got a budget, we've got a plan. Our expectation is we deliver on our plan. Mike, do you want to elaborate on that?

Mike Doolin

Yes Paul. I think we put out on Slide 10 in the deck of what we expect to see for our cost per gold equivalent ounce sold for each site and again, it's just based on all the experience that we have here in Nevada and in Canada on mining these types of deposits.

Josh Wolfson

Okay. I didn't get to press a little bit more on this just because I think the cost were higher than expected for True North and because it's in the ramp-up phase and I guess because the mining costs are fairly low for that operation versus the other ones, are you guys able to comment on what your targets are for True North underground mining costs when it's ramped up?

Paul Huet

Yes so, I think there might be a disconnect there Josh because I don't think we ever put out some targets that I'm aware of for True North mining cost in '16, but I could be wrong. I am getting older. Alzheimer's might be kicking in. So, I didn't have any surprises at True North whatsoever.

In fact, we committed a certain amount of dollars. We ended up producing the amount of ounces we thought to actually reduce a lot of those costs. So, I was very impressed with that. We weren’t looking at trying to come in at below $1,000 an ounce by any means, anything below $2,000 we were trying to get this thing back up and going, get some drills going, produce a mine plan that we were comfortable with that we can produce -- share with our shareholders that would demonstrate we can make some money from this operation.

So, I'm not sure how that portrays the mining costs are little higher. So that one is a little confusing to me, but I don't think there's any doubt that the costs are aggressive at True North. I've been on site with the teams. I spoke to the General Manager there. We have high confidence that we're going to deliver on we said we do like we've always done Josh.

Josh Wolfson

Okay. So, cost in mind at least for the ones from the October [40%], but that's fair. I understand you guys ramping things up and it's a little bit influx for the time being. At Fire Creek I guess where things are a bit more stable, can you comment on what proportion of mining a long haul or expectations are for long haul for 2017?

Paul Huet

Yes, Mike, do you want to comment on that. My memory is we still had like 40% long haul last year and 60% cut and fill, but Mike do you want to talk about the 2017 budget? Is it still at same rates or are we slightly changing?

Mike Doolin

Yeah, this next year, our goal is, I think the budget is around 35% to 40% long haul at Fire Creek.

Paul Huet

Okay. So, we're down about 5%. So, last year we were around 40%-60%. So, we're hovering close to where we were last year maybe slightly a little less long-haul than we were last, but fully anticipating that the areas to the north are not in -- we don't have drifts or tunnels out to that area to the north that Brian talked that are much wider and we're not going to get there in '17, but we will be there by '18 for sure.

Josh Wolfson

Okay. So, I guess on that, on that sort of split or I guess even if you're increasing it slightly to account for something Northern area extension, what would be your estimated mining cost with that kind of blended cut and fill at long haul proportion?

Paul Huet

Mike, didn't we put out our guidance for our cost for Fire Creek? And I missing?

Mike Doolin

We put out -- we always put out guidance -- cash cost per gold equivalent ounce sold. We don't put out our guidance based on our cost per ton.

Paul Huet

The more we start unifying these mines together, which was something we've always wanted to do, we are experiencing synergies throughout it. It becomes a lot more complex to run Fire Creek separate from Hollister and separate from Midas and then in fact that's not something we want to do in the future.

We want to link them all together rather than continue to have them individualized because the truth is we're running so many synergies behind the scenes, it's actually quite difficult to depend -- it's more difficult to pinpoint at each by site. It's a lot easier to say, look we're mining X amount out. So, it's X amount of tons.

In Nevada, we got one central mill, everything is said through one mill. It's very unique our company. Anyhow I'll just leave it at that.

Josh Wolfson

Okay. That's fair. All right. I appreciate you guys answering the questions. Thank you.

Paul Huet

Thanks Josh.


The next question is from Sam Crittenden from RBC Capital Markets. Please go ahead.

Sam Crittenden

Yes thanks. Hi. I'll ask another question on True North. I am just curious; you guys have now had a chance to get underground for a couple months and do some mining. Has anything changed in your overall impression just in terms of the continuity and dilution you're able to see underground there, now you've been mining in it for a little while.

Paul Huet

Actually, we've had some very positive results on our reconciliation. When we looked at our reconciliation, our dilution has improved, but we took that same approach that we did at Midas. We narrowed the drift down. We looked at the top cuts and bottom cuts.

We're no longer using any blind uppers, which were a pretty common practice there. So, by stripping blind uppers out, by narrowing things up, we've seen a tremendous improvement in dilution already from the work we've been able to reconcile to Sam.

In all honesty, we've taken all the historic work and we're quite happy with our dilution effort already. What we are seeing that has been very, I don't know what surprised, but it's very beneficial for us and for our future, is how the grades have held or the continuity and everything how it's holding at depth.

Every time we seem to drill at depth, we're seeing some impressive results, much higher grades, we're looking at putting all this together into a mine plan and it's quite impressive for us. It's in the short term, it's really helped us and we're looking forward to this continuing as we go deeper actually.

Sam Crittenden

So, you're not having any issues in terms of continuity and following the deposit because I think that was one of the concerns that had happened in the previous operators?

Paul Huet

Well and I'd say that we're not trying to run at 2,000 tons a day rate. So, because we're reducing that Sam, we're able to make sure our channel sample guide us rather than somebody making calls underground and trying to follow something by eye.

This type of deposit cannot be followed by eye and if you're trying to see the mill at 2,000 tons a day, you're going to struggle with the continuity and because you're going to be trying to make really quick production decisions, you'll make mistakes. And to date because we're at a much slower rate, we have the advantage of waiting for assays and then making decisions.

Sam Crittenden

Okay. That's helpful color and then just one other one for me, I am just curious on the timing for the Hatter Graben system. It sounds like you're doing some surface drilling this year, but what would the timing be just high level in terms of getting a decline into that and what sort of permits do you need to access it from underground?

Paul Huet

Okay. So that's a good question actually Sam and it's actually -- it's an interesting question because so if you think about the EIS, the EIS is complete at Hollister. Included as part of the EIS was a ramp for the Hatter Graben system. In fact, when I worked for my former company, I actually put that ramp into the EIS.

Now if I listen to your question properly, what you need permitted from underground, you don't need anything. If you're going to access that from the underground, you can just drive the tunnel east toward it. We're going to be doing trade-off studies to understand should we be accessing from the underground, should we access from surface.

It's all going to really depend on the drilling. The drilling will guide us. The drilling will give us indication on which way to go and we need to start that drilling, our best-case scenario is if we could start up drilling and we start drilling from the Hatter Graben towards our mine workings and close that gap, that would really encourage us to put the drill, the drifting from underground.

So, if we were able to close the gap in Hatter Graben to the existing workings and say hey, that starts to connect a lot closer than we would start driving likely from underground, but until we have some drilling, it's a little premature to make that decision because it's probably about an $8 million to $10 million drift to drive east to get to the Graben where it sits today.

But again, that is -- it's only constrained by drilling. So, we have an envelope on the Graben zone, but it's constrained by drilling. Does that make sense. So that's actually a good question.

Sam Crittenden

Yes, thanks for that. So, I guess after this summer's drill program, you'll have a much better sense for what the next steps are, That's the point here.

Paul Huet

No doubt about it. After this summer's drill program, we're going to be able to make a lot more important decisions on drifting from underground, drifting from surface or maybe from both. It's possible that we say holy cow, we started stepping in and we brought it closer and it makes more sense to drive from the bottom and that surface has already permitted maybe we attack from both.

You're right in saying that it really is dependent on this, the drill program.

Sam Crittenden

Okay. Thanks Paul.

Paul Huet

Thanks Sam.


The next question is from Ralph Aldis with U.S. Global Investors. Please go ahead.

Ralph Aldis

Hey Paul. Hey guys. Congratulations on the success you guys have delivered and I would, I would say that in the past couple years, you guys have delivered a positive return on invested capital very consistently compared to many of the peers that basically went negative on returns of invested capital the last two years.

I guess when I look at what all you're doing here and what I am particularly focusing in is that Slide 14 where you have all the I guess you would say the ovals and the anomalies where you all basically see future growth and probably future resources, which NAV's are not known to really possibly reflect because they just don't give much value for anything more than 10 years and that's not really the best model.

But what do you think when you look at that slide and think about your future. It really looks like there's some positive things that will come out of this as we go forward.

Paul Huet

Thanks Ralph. That's a very good question. I am going to answer it initially but Brian be ready because I am going to turn over to you. So, look when I look at this, I think anything is possible Ralph. When I consider our location and I know the history of this area, do north of six miles is mill Canyon.

It produced a million ounces. It's got new one. 18 miles south of us we've got Cortez which is Barrick's property, which runs at don't quote me on this, but I believe it's somewhere right around a million ounces at year end. So, we've got a new month north of us. We've got ourselves and then we've got Barrick south of us. So, we're located in a huge a great geographic location. So, our zip code is the right address.

And then when I look at this geophysics, and I know that Fire Creek used to having the around the ellipse around it. That when we look at Fire Creek initially, it had that same ellipse you see in all those other ones. We tested three of those ellipses out for the first time ever and we intentionally delayed testing these things and stepping out because we wanted to wait till we secure the land position.

We didn't want to get out there and get ahead of ourselves and pay a lot of royalties. We spent a lot of time in securing the land for two years and then once we had the land, we announced to geophysics and we started testing this. We have three of them tested, all of which hit economic ore.

Now in my whole career, I haven't seen this. We've got a million ounces in the one ellipse. What can it be, who knows. It could be something much larger in scale, much more massive and it's a potential -- there's a possibility that we might be exploring maybe an open pit in some areas or maybe we have three ramps at Fire Creek producing 300,000 ounces but the future is quite bright for Fire Creek. It remains our flagship and we're going to be exploring it that way because it is that important to our company.

And with that, I am going to turn it over to Mr. Brian Morris to see if he has any color to add to it. Let's hear some of that passion Brian.

Brian Morris

Well Paul, you've done a really good job, already capturing what this math means, but the thing is I've never had in my career geophysics be so successful in exploration program in a district and when you look at the geophysical anomalies over our current known resources, which you see on the map in the little red squiggly lines, those are actually the model veins.

You see [sitting through] that set that the deck gives plus what we drilled through, drilled into in the east zone, north zone and west zone, same type of anomalies in all three hit. All I can say is when you look at the rest of the map here, I feel very confident they we're going to continue to have similar success as we're stepping off to the north-south and to the east.

One last thing I want to point out is that just look at our footprint of the mine. You can see those little development on there, that represents a million ounce resource right there. So, you extrapolate out to the rest of that district that could give you the suggestion of which it might have in the future or what we might have and so I don't have much more to add to that but I hope that helps.

Ralph Aldis

So, for the amount of capital that you guys have laid out to acquire assets, hands down nobody can beat you guys in terms of what you'll been able to acquire and what you have ahead of you and now all you have to do is drill and develop and you guys have been great stewards of capital. So, I'm very proud of what you guys have achieved.

Brian Morris

Thank you.

Paul Huet

Thank you very much, Ralph.


This concludes the time allocated for the question-and-answer session. I would now like to turn the conference back over to Paul for any closing remarks.

Paul Huet

Okay. I want to really thank everybody for their time and effort today. We appreciate all of you following us. We appreciate all your support. Last thanks out to my team and our contractors and the Board.

We truly appreciate everyone's support and effort throughout the year and 2017 is going to be another exciting year for us and we are all curious to see what's going to be on the end of those drill bits and I'm sure each and every one of you are equally as excited about seeing what the end of the drill bit in going to return for us. So, thank you very much and have a great and wonderful day.


This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.

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