Kirkland Lake Gold's (KL) CEO Anthony Makuch on Q3 2017 Results - Earnings Call Transcript

Kirkland Lake Gold Ltd (KL) Q3 2017 Earnings Conference Call November 2, 2017 2:30 PM ET

Executives

Mark Utting - VP, IR

Anthony Makuch - President, CEO & Executive Director

Philip Yee - Executive VP & CFO

Ian Holland - VP, Australian Operations

John Landmark - VP, Exploration for Australia

Pierre Rocque - VP, Canadian Operations

Douglas Cater - VP, Exploration for Canadian

Analysts

Cosmos Chiu - CIBC Capital Markets

Michael Parkin - National Bank Financial

Stephen King - M Partners Inc.

Dan Rollins - RBC Capital Markets

Steven Butler - GMP Securities

Operator

Good afternoon, my name is Judi and I will be your conference operator today. At this time, I would like to welcome everyone to the Kirkland Lake Gold Third Quarter 2017 Conference Call. [Operator Instructions]. Mark Utting, you may begin your conference.

Mark Utting

Thanks very much, operator, and welcome to our conference call today to discuss Kirkland Lake Gold's third quarter and 9-month results in 2017. With me today are Tony Makuch, our President and Chief Executive Officer; Phil Yee, our Executive Vice President and Chief Financial Officer. We also have both of our country VP, Ian Holland, our Vice President of Australian Operations is here; Pierre Rocque, our Vice President of Canadian Operations is here as well. And we also have our Heads of Exploration, Doug Cater, our VP of Exploration for Canada; John Landmark, our Vice President of Exploration for Australia. There are also other members of the management team in the room as well.

As I indicated today we'll be providing comments on the results for the 3 months and 9 months ended December 30 for Kirkland Lake Gold. We have -- everyone I just named will be giving some remarks today, and then we will open it up for questions after that is over. I'd first like to make a specific reference to the forward-looking statements advisory that is on our website and it is part of today's presentation. Today's presentation is being webcast on our website at www.klgold.com.

Our remarks and answers to your questions today may contain forward-looking statements about future events and the company's future performance. As I indicated, I refer you to those cautionary remarks on slide 2 and on the website, which are also included in our management discussion and analysis. The company's MD&A and financial statements have been filed on SEDAR and are on the website. Also during today's call we will be making reference to non-GAAP and non-IFRS performance measures, a reconciliation to these measures is available within the earnings news release and in our MD&A for the period ended September 30, 2017.

Finally, during the call, we will be comparing our Q3 and year-to-date results to prior period. Participants are advised that prior period for November 30, 2016, do not include results for our Australian operations, which were added through the merger of Kirkland Lake Gold and Newmarket Gold. In addition, for year-to-date comparisons results in 2006 include the assets of St Andrew Goldfields principally from Holt and Taylor Mines from January 26, 2006. All figures today are in U.S. dollars unless otherwise specifically indicated.

With that, I'd like to turn the call over to Tony Makuch, our President and Chief Executive Officer.

Anthony Makuch

Okay. Thanks, Mark, and thanks, everyone on the call and appreciate you taking the time to hear our story. And before I get started, as I'd like to do every quarter, I want to start by thanking our over 2,000 employees that work for the company both Canada and Australia, all of our suppliers and our contract et cetera, it's really that hard work of those people and the dedication of what they do that allows us to sit here and talk about some really good results, and we get the opportunity to talk about good things and take credit for work of a lot of other people and we really appreciate what they've done. The company itself Kirkland Lake Gold is having a very good year and we see moving forward that we're going to continue to have strong performance besides going into Q4 into 2018 and '19.

Turning to the performance of Kirkland Lake Gold reported for Q3, we report -- we see we had very solid financial and operating results. In addition, I can tell you that we're off to a very strong start to the fourth quarter -- a final quarter of the year. And with that, we did announce in our press release recently that we just put out that we just complete the record months at Fosterville producing over 30,000 ounces of gold with an average grade of 23 grams per tonne. We are on track, we would have a strong quarter in Canada as well. You get the sense of possibilities, really continues to be a very, very special deposit and very, very special mine in very, very special place.

I'd like to talk to you a little bit more about the outlook for the end of the year later in the call. And turning to slide 4, some of the highlights I'd like to start that include the fact that one we produced a 139,000 ounces, our second best quarter of production ever and up over the 80% from last year's third quarter, but that largely reflects the addition of Fosterville. Fosterville itself had it's second best quarter ever in Q3 2017. And second best quarter I should say by a long shot.

Also during Q3, we more than doubled our reserves at Fosterville to over 1 million ounces at an average reserve grade of about 18 grams per tonne, significant increase in reserves and significant grade increase as well. And I've already mentioned that record month at Fosterville in October, but based on that performance as well as our results to date and our plan for the rest of the year, we announced the improvements to our 2017 production and cost guidance for production and all targeted to meet or beat the previous guidance -- where we're talking about 580,000 ounces to 595,000 ounces of gold production for the year.

Going to slide 5, highlights for the use of cash. We made an strong -- we made an important strategic investment in Q3, investing $60 million we acquired about 26 million shares and 14 million warrants in Novo Resources. We are very excited about this investment both Novo and our geologists have identified the presence of gold mineralization at multiple locations along a regional strike extent of 85 kilometers. This mineralization is largely in the form of watermelon-seed shaped nuggets. For the quarter, we've recorded pretax gains of about $100 million on our Novo investment at a very significant value in a very short period of time and we think that there's still a lots more to come on this.

Turning to the next slide, other uses of cash include making our first quarterly dividend payments during Q3. We recently made our second payment and today announced an increase in the dividend $0.02 per share, from $0.01 cent per share previously noted, but this dividend would become effective for shareholders of record of December 31, 2017. We also have continued to buyback our stock. We repurchased another 1.9 million shares during Q3 and continue to repurchase shares in October. In total, we now have repurchased 4.8 million shares, representing about $51.9 million as of today, and I can tell you that we plan to continue to use in our normal course issuer bid to repurchase stock with excess cash.

We are doing this, because we continue to feel that our company shares are significantly undervalued in the market.

Turning to slide 7, we were particularly encouraged by our cost performance in Q3. Phil will get into the details a little bit later, but I'll highlight the fact that we saw a significant improvements in both cash costs and all-in sustaining costs compared to the third quarter of 2016, despite stronger Canadian dollar compared to a year ago. Cash costs were unchanged compared to last quarter, despite strong currencies. All-in sustaining costs were higher, which was due mainly to the timing of sustaining capital expenditures and responsible investment into our mines.

In Canadian dollars, our unit costs in Canada improved quarter-over-quarter, in fact looking at our cost per tonne mined that improved 14% for our Canadian operations in Q3 to $184 an ounce.

Going to slide 8 now our earnings for Q3 were solid, totaling $43.8 million or $0.21 per share, that included a $19 million pretax gain on the Novo warrants. We also had significantly higher exploration expenditures compared to the previous quarters and in Q2 2017 as well, we had a higher tax rate -- in Q3 '17 we had a higher tax rate.

Turning to slide 9, our cash flow also continued to be strong. We generated free cash flow of over $31 million during the quarter. This brought the total amount of free cash flow generated year-to-date to over $113 million. We believe our company to generate free cash flow is a key competitive advantage. Our significant free cash flow generation supports our efforts to pursue organic growth at our high cost mines and our targets, it also is a key driver in our ability to buy back our own stock and start paying a quarterly dividend. I can tell you that during the recent pullback in our share price, we have been in the market buying back shares and I can also tell you that we have the ability to continue to take advantage of attractive opportunities in the market as we go forward.

Going to slide 10 now, our 9-month performance against guidance. Looking briefly a year-to-date, you see in the first 9 months of 2017, we produced about 430,000 ounces in combination with our expectation for a strong final quarter of the year, including record production at Fosterville in October as I previously mentioned. We are now targeting 595,000 ounces of gold production for the year. Looking at our unit costs, we are right on track, our 9-month cash costs of $508 per ounce. And our all-in sustaining cost year-to-date of $811 per ounce are well within guidance. We now expect to finish the year with cash cost between $475 and $500 an ounce and all-in sustaining cost of $825 an announce. So we're targeting that our fourth quarter costs are going to be significantly lower than our year-to-date and pull us down a little bit.

I'll now turn the call over to Phil Yee, our CFO for a more detailed review of the financials.

Philip Yee

Thank you, Tony. Before I get started, I want to provide a second reminder that all figures referenced are in U.S. dollars unless otherwise stated. I will also point out that reporting periods prior to November 30 of 2016 do not include our Australian operations, also the 9-month 2016 results include our Holt and Taylor mines from January 26, 2016 onwards.

Starting on slide 12, Tony has already mentioned the key elements of our quarter 3, 2017 results. We generated net earnings of $43.8 million or $0.21 per share, which compare favorably to both last year's third quarter and Q2 of this year. Net earnings included a $19.2 million pretax gain on Novo warrants. We also had $16.9 million of exploration spending in Q3 and a higher effective tax rate for the quarter, than in the other two prior periods. Just to address the Novo gain in a little bit more detail. Tony mentioned $99.5 million of pretax gains on our Novo investment, $19.2 million of these gains were on the warrants and they recorded in the other income in the P&L. $80.3 million is the pretax gain on the $25.8 million common shares of Novo that we currently own. This gain is recorded net of tax in other comprehensive income. The after-tax amount is $69.7 million. In total, our strategic investments at the end of Q3 had a carrying value of $151 million, most of that amount is related to Novo.

Moving on to slide 13. Revenue for the quarter was $176.7 million, an increase of 75% from Q3 of 2016, reflecting an 81% increase in gold sales to 138,000 ounces. The addition of our Australian operations since third quarter of last year had a very significant impact on our revenue versus the same quarter a year ago. Q3 2017 revenue compared to revenue of $189.9 million in Q2 of 2017, the change was a function of volume. In Q2, we had record gold sales of just over 151,000 ounces, compared to about 138,000 in Q3. As Tony indicated already, we are expecting a strong fourth quarter in terms of production and sales.

Gold sales were not that significant of a factor. The average realized price for Q3 2017 was $1281 per ounce, which compared to $1321 in Q3 of 2016 and $1256 in the second quarter of this year. Our EBITDA totaled $98.1 million, which is a 116% better than in Q3 2016 and a 7% improvement from the previous quarter of this year.

Moving on to slide 14, and turning to costs. Total production costs in Q3 2017 totaled $66.5 million, which compared to $41.3 million in Q3 of 2016 and $72.9 million in the previous quarter. The change from the same period in 2016 mainly reflected the inclusion of the company's Australian operations, effective November 30, 2016. The lower cost from Q2 of 2017, mainly reflected to increased productivity at our mines during the current quarter.

Moving on to slide 15, in terms of unit costs. Far more significant in terms of profitability is the unit cost performance, which as you've heard from Tony, continue to be very strong in Q3. Our operating cash costs were $482 per ounce sold, which represented an 11% improvement from Q3 of 2016, mainly reflecting inclusion of the company's Australian operations in this year's third quarter. Operating cash costs per ounce sold for Q3 2017 were unchanged from Q2 2017. Operating cash costs per ounce for the Australian operations in Q3 2017 improved 5% from $393 per ounce in Q2 of 2017, and this is due to the removal of high cost ounces from the Cosmo Mine, with the mine being placed on care and maintenance effective June 30, 2017. Operating cash costs for the Canadian operations were similar to the $579 per ounce recorded last quarter, with the small increase reflecting a stronger Canadian dollar in Q3. And as Tony indicated in Canadian dollars, our unit costs improved in Canada.

All-in sustaining cost per ounce sold averaged $845 per ounce sold in the third quarter, a 13% improvement from Q3 of 2016. The improvement reflected lower operating cash cost per ounce sold, as well as lower levels of sustaining capital expenditures per ounce sold. All-in sustaining cost in Q3 of 2017 compared to $729 per ounce sold in the previous quarter, largely reflecting higher levels of sustaining capital expenditures in Q3 of this year, as well as changes in the exchange rates.

In terms of -- slide 16 on capital. Our capital expenditures for the quarter totaled $44.1 million, for the year-to-date our capital expenditures totaled $105.9 million, which compares to our full year guidance in the range of $160 million to $180 million. In our 2017 plan, our capital expenditures weighted to the second half of the year, based on the timing of equipment purchases and critical spares, as well as the timing of planned capital development. We are maintaining our guidance, which indicates we will have higher capital spend in the final quarter of this year.

Slide 17, looking at our financial position, we had cash at September 30, 2017 of just over US$210 million. Free cash flow during Q3 totaled $30 million and for the year-to-date totaled $113.5 million. In terms of uses of cash, we have already discussed the $61 million invested in Novo in Q3 of 2017 and a $51.9 million to date used for our share repurchase program, of that amount $39.5 was spent to the end of Q3 and about $12.4 million has been spent so far in Q4.

In terms of debt as discussed last quarter, we repaid $43.8 million to redeem our 6% convertible debentures out of our existing cash on June 30 of this year. Our remaining 7.5% debenture has a carrying value of $48.9 million and a conversion price of $1370 per share. We expect that they will likely convert for about 4.5 million shares. Should they not convert, we are well positioned to redeem them in cash on the maturity date.

To conclude financially, Kirkland Lake Gold is in a very strong position, we are generating solid financial results and significant free cash flow. We have over $200 million in cash, and will soon be debt free. Our operating costs are low, which supports future cash flow and investment for growth going forward.

With that, I'll turn the call back over to Tony.

Anthony Makuch

Okay. Thanks, Phil. Maybe before [indiscernible] now we want to focus on our key operations in both Australia and Canada. Ian Holland, our VP operations for Australia will give some color on what's happening and discuss Fosterville. John Landmark, our VP operation for Australia will give you a sense of what's going on, on exploration-wise in Australia, and then Pierre Rocque, our VP Exploration -- VP operations for Canada will talk about the Macassa Mine and Macassa operations, what's going on there. And then Doug Cater, our VP Exploration in Canada will give a little bit of color of some Canadian exploration.

With that, Ian, you can take the call.

Ian Holland

Thanks, Tony. Before I get to the record of monthly performance, just recorded in October Q3. In Q3, we had another very solid quarter at Fosterville. In fact it was the mine's second best quarter ever. So production for the quarter just under 62,000 ounces. Really the issue that we had at Fosterville was in Q2, where a number of stopes outperformed on grade and some outperformed significantly. In Q3, most of our stopes came in as expected, we did have one stope that underperformed mid-quarter that cost us a few thousand ounces. And we had a very good September, and as I mentioned earlier we just completed a record month in October producing over 3,000 ounces. I want to point out that a stope on the same level as the one that underperformed in Q3 significantly overperformed on grade in October and contributed to a record results for the month.

Operating costs at Fosterville continued to be a very competitive -- a key competitive advantage for our company. Cash costs averaged $295 per ounce, while all-in sustaining costs were $574 per ounce. Year-to-date [indiscernible] cost are even better, cash costs averaged $281, while all-in sustaining costs were right at $500 per ounce.

Looking at slide 20. We can see a long section of the Phoenix system highlighting the areas mined in Q3 with a development and starting on multiple levels. As [indiscernible] mentioned previously that underperformed is highlighted in red on the Phoenix 40 to 20 level, importantly the overperformance in October was driven by a stope on the same level just to the left in the image. One point that I really want to stress at this stage is that there's nice one contribution to production as yet. So current production is from both west and east dipping lands including Eagle within the current -- with the current stoping front being in excess of 100 meters above the start of the Swan Zone.

So with that, I'll now turn the call over to John Landmark, the Vice President for Exploration Australia.

John Landmark

Thanks, Ian, and hello, everybody. In Australia, we've got two major exploration programs. The one is effectively around Fosterville and within the mine in Victoria. The other is in the northern territory, focused mainly around our Cosmo Lantern ore complexes, and also at the Union Reefs. To give you a sense of scale, across the programs we've got 10 drill rigs, 5 underground and 5 surface rigs across a number of underground operations. We've also got another 5 rigs at Fosterville underground just doing ore body delineation, so a total fleet of 15. In an exploration drilling alone so far this year we've done about 85,000 kilometers of drilling, which is considerable amount. If you look at the slides that's in front of you, slide 21, you can see that the drill traces of our programs and in the red and green colors are the programs at Harrier, Lower Phoenix 1, and off the page would be further drilling at Robbins Hill, and what's not shown here is the drilling that we're now actually doing outside of the mine lease, but within our exploration lease.

So we are targeting at least 5 or 6 parallel loads to the Fosterville Fort zone. And in addition to this we have been doing regional surveys, TD seismic traverses, saw programs and recently we flew a helicopter airborne in survey. But if we turn to the next slide, slide 22, of key interest at this stage Swan, which makes up 50% of our reserves. To explain that there are at least 4 rigs currently exploring this bonanza court. This long section shows you in the blue colors and interpreted extrapolation effectively to the south and plunging to the south away from what we've defined in the Swan reserves. And in August 8 release and within the MD&A, we've given you details of really what is -- outstanding exploration intercept, but I can say that in the last couple of months we've certainly got a few more to come.

We're working at the moment through the results doing some QA, QC and all I can say is that you can expect a news release shortly. So really in summary our investment in exploration absolutely is delivering results in Australia and with that I will hand over to Pierre Rocque who is our VP for Canadian operations.

Pierre Rocque

Thank you, John. Macassa had a strong third quarter. We produced just over 42,000 ounces, which was up 12% from Q3 2016 and was 5% higher than the previous quarter. In August on our Q2 call, I made the comment that we were not going to continue to mill significant material from our low grade stockpile. We did process a very small amount in Q3 about 1,000 tonnes that compared to 18,000 tonnes in Q3 2016 and 15,000 tonnes the previous quarter. We milled 92,000 tonnes run of mine during the quarter, which was up 13% and 3% from the prior year and previous quarter respectively. Our average grate of 16.5 gram per tonne was about 20% higher than both prior periods. Operating cash costs were $522 an ounce in Canadian dollar terms, they were CAD 677 an ounce, which as I mentioned, was 8% better than a year ago, and 5% better than last quarter. Cost per tonne showed solid improvements quarter-over-quarter. The average CAD 314 per tonne, which includes mining, milling and G&A, which was better than the CAD 336 per tonne, that we achieved in the second quarter. Part of the reason for that is higher run of mine tonnes mined in mill. We are also working on improving productivity. For example, we are replacing older equipment with newer equipment in a number of key areas. Beside a significant impact as the new equipment is more efficient and in the case of our new truck fleet larger, faster and with longer life batteries. All-in sustaining cost in Q3 average $842 and $804 an ounce year-to-date. As expected our sustaining capital expenditures increased in Q3, reflecting the timing for some of the equipment purchases and capital development. Looking to Q4, we expect to see higher production based on an increase in both tonnes process and average grades.

I'll now turn the call over to Doug Cater.

Douglas Cater

Thank you, Pierre. Exploration on our Canadian properties was accelerated in Q3 with a total of 14 drills producing over 71,000 meters of core on company exploration programs. At our Canadian flagship the Macassa Mine, the total of 8 drills were testing for mineralization associated with the South mine complex, to the East and West and also testing the upper row 04 Break for mineralization above the 3,000 elevation. In late June, we reported drill results, which continue to extend the South mine complex zone a total of 260 meters to the East of the year-end resource shape. Drilling continues to infill and extend the South mine complex to the East and exploration results are expected shortly.

Next slide, at Taylor drilling is focused on extending the mineralized zones to the East of the shaft deposit and at depth below the West ore free deposit. We have a total of 4 surface drills operating at Taylor where we reported mineralization extending over 1,800 meters east of the shaft deposit. And we continue to drill to test the down dip extension of the West Porphyry zone at depths ranging from 500 meters to 1,000 meters below surface, which is well below our current infrastructure. During the quarter we acquired five area properties located along the Porcupine-Destor Fault with favorable geology. And additional surface drill is testing targets on some of these new properties. Exploration results from these programs are expected shortly.

I'll now turn the call back to Tony.

Anthony Makuch

Okay. Thanks, Doug. Thanks all the other speakers and we come to our concluding slide here, I guess one of the things will come to point whenever you make is that Kirkland Lake Gold is a company committed to generating returns for its shareholders. We are having a very strong year in 2017 and it just improved the production guidance for the year, for the third time this year by the way. Our business continues to generate significant free cash flow. And I can see, we also have a very strong cash position and that supports -- that gives us a very strong balance sheet, which provides us with financial strength to invest in growth. We're deploying our capital effectively at our high grade gold mines and through extensive exploration programs.

We're also making some very strategic and important investments in other entities, particularly at Novo. In addition, we are using our capital, so directly we report shareholders, we have repurchased almost 5 million shares through our normal Colossus Riverbed. We have introduced a dividend and last quarter we paid down our debt with cash at the end of Q2, and now we just announced that we are actually increasing our dividends or doubled our dividend for shareholders of record as of December 31, 2017.

So with that I'll conclude the call. And we'll be happy to take any questions you may have.

Question-and-Answer Session

Operator

[Operator Instructions]. Your first question comes from the line of Cosmos Chiu of CIBC. Your line is open.

Cosmos Chiu

Hi, Tony and Phil and team. Congrats and thanks for hosting the call. A few questions from me here, maybe first-off of Fosterville, certainly a very good monthly production on October 30,000 ounces. If I reverse engineered it, you would be looking at a grade that's higher than your reserve grade. I guess my question is, at this point in time sustainable, are you at that point in time, where you can on a sustainable basis mine and mill at the reserve grade, I know you sort of answer my question previously, it's likely we're not there yet, but I just want to confirm?

Ian Holland

Yes. Thanks, Cosmos. Ian here. Yes. So to say that we're not at that point, that doesn't reflect that, the average reserve grade of 18 grams includes a contribution from the high grades Swan Zone, which remains below us currently. So the material that we're mining, we are essentially mining in the lower Phoeniz zone, so west and east dipping lenses including Eagle. Q3 was a little under given the stope that missed and obviously October was over. So in balance we're seeing reasonable reconciliation to reserve, and if you look at the full months in total, a bit of a positive, but I wouldn't draw too many trends from that at this stage.

Anthony Makuch

Year-to-date our average grade to just under 15 grams per tonne, and it fits well with we are using mining as part of the reserve. And as Ian said once we get into the swan zone, that's where the much higher grade material is that we don't really get there until second half of next year.

Cosmos Chiu

And then in terms of underground development at Fosterville, I saw that it's ramped up in Q3, I think I saw it at 842 meters in terms of operations, 1,362 meters in terms of capital. Underground development, is that sort of like the run rate, is that what you would need to do on a quarterly basis or in a perfect world, which even -- would you want that to be even higher?

Ian Holland

Yes. Ian again, from our perspective, we're certainly focused on increasing and development direct across all categories including exploration for drill platforms, which are reported in exploration, and we are targeting a 1,000 meters a month and getting close to that run rate, so the sort of rates that you're seeing now we would see sustainably going forward and perhaps even higher that would allow us to drill material forward.

Cosmos Chiu

Maybe switching gears a little bit, the earnings that came out today was a bit lower than what I had expected in part due to I guess some residual costs coming from Cosmo. Looking at the financial statements, I saw that $6 million in terms of operating costs came through in Q3, I thought Cosmo had ended at the end of Q2. So I'm just wondering, are we going to see any ongoing cost coming from Cosmo or was that like closure cost one time?

Philip Yee

Hi, Cosmos, it's Phil here. I mean in Cosmo, it did going to care maintenance effect to June 30. There was some stockpile or that was being processed, but mainly it's care and maintenance costs going forward. And for the rest of the year.

Cosmos Chiu

Okay. So should I be expecting putting into my model $6 million per quarter in terms of care and maintenance?

Philip Yee

No. I think care and maintenance cost is probable $1.5 million to $2 million per month.

Cosmos Chiu

A month?

Philip Yee

Per month, yes.

Cosmos Chiu

So $1.5 million per month, so it's about $4.5 per quarter?

Philip Yee

Yes.

Cosmos Chiu

Maybe, this is a question for Phil as well. I see that exploration costs have gone up in Q3, quite significantly. Again, is this sort at a level that I should be looking at on a go-forward basis. Certainly it sounds like from Doug and John, there is a lot of exploration upside both coming from Australia and Canada. Is that sort of the run rate now for exploration expenditures?

Anthony Makuch

Well, I think from a year-to-date and forecasts to the end of the year, Cosmo we expect it to be within our guidance for total exploration costs. So I think it's just a matter of timing from quarter-to-quarter, but I think from an annual perspective we expect to be where we set our guidance.

Cosmos Chiu

Okay. And then maybe one more for Phil. Any kind of ideas in terms of hedging, either to Canadian dollar, the Australian dollar?

Philip Yee

We are looking at that Cosmos, I think in Q3 the Canadian dollar and the Aussie dollars basically strengthened, but it's kind of turned a bit in Q4, and we are looking at different options. So we are in that process of looking at different options of perhaps doing some foreign exchange type of strategy. But there's nothing in place to effectively right now.

Cosmos Chiu

And maybe one last question going back to Tony here, as you mentioned the Novo investment was very strategic, very important. I'm just trying to understand in terms of your longer-term sort of plans and ideas for that investments. Certainly you've already done really well, you've booked a [indiscernible] a non-cash gain on it in one quarter, but $99 million in terms of non-cash gain. So I'm just trying to understand what your future plans are, what your long-term plans might be for the Novo investments?

Anthony Makuch

We are not an investment funds company. We are a gold mining company and our investment into Novo is sort of an extension, an arm's length extension of our exploration and growth strategy. And so, our goal here is at some point in time this would be -- if this becomes an economic deposit, this is something that we want to participate in more from a production and mining point of view. So that's our goal, with that what we're doing at Novo, it gives us a foothold into it, and we know we get a little bit also an understanding of what's going on there. And where we have a better chance of being and really knowing what to do and taking this forward and turning it into production operations.

Philip Yee

Just one think Cosmos, I wanted to clarify, when we talked about the care and maintenance over at Cosmo -- it is $1.5 million a month or $4.5 million a quarter, but don't expect that, don't put in your model and expect that. We're going to run it like that for a long time, that's not our intent. If it's going to be $4.5 million, we're working on a plan on what to do with the northern territory, but our intent is not to keep it in care and maintenance at those levels for a significantly long time, so you might put in for the quarter, but not much longer.

Cosmos Chiu

So our status quo is $4.5 million per quarter, but the status quo will likely not last for too much longer?

Anthony Makuch

Yes. Well, that might be the status, but there's not much quo there.

Operator

Your next question comes from the line of Mike Parkin of National Bank. Your line is open.

Michael Parkin

I had just one question, most of them got answered there, but on Fosterville, the OpEx, the other assets showed fairly flat operating costs in U.S. dollar terms. Quarter-over-quarter could be explained away by a currency movements for sure, but with Fosterville, they're up over 20% in a millions of dollars U.S. based. Certainly, the Australian dollar appreciated 5.5%, which would have been a headwind for you guys. You did a better third more development meters that you expensed, just wondering, should we expect those costs unlikely when you back in it and on [indiscernible] basis, they're up still a bit, are they going to -- is that kind of a temporary event or are we had a kind of run rate now at a slightly higher level going forward?

Ian Holland

Yes, Mike. I'm Ian here. I mean there is some timing variance in this, so 3 operating -- matter of operating development and that will move around from period-to-period and quarter-to-quarter. So wouldn't necessarily project forward the previous quarter as the right and as average over a period as a more likely number.

Operator

Your next question comes from the line of Steve King of M Partners. Your line is open.

Stephen King

Just a quick question on the -- you came in a bit late on the investing cash flow versus our estimates and obviously you're about 105 for the year and backing into about 160. So there's going to be a bit of a bump up in the last quarter, two parts to this, are there some projects that are behind where you wanted to be and could you add a bit of color were the major expenditures will be in Q4 in that category?

Anthony Makuch

Well, I think in Q4, there has been -- some of it is timing and related to equipment deliveries et cetera, and mine development, particularly at Macassa, but I don't know, Phil, you want to give a little more color to that?

Philip Yee

Yes, Tony. I would agree most of it's timing. I think for the first three quarters, we were behind where we were expect to be in terms of capital development and some of the equipment orders. I think we're still going to be probably end the year slightly not at the level of capital development that we had expected, but we're going to -- a lot of that difference is made up with equipment and infrastructure improvements and so forth in Q4. And that's primarily in Canada, I think most of that increase in Q4 will come through the Canadian operations.

Stephen King

How was the ramp development, is that on schedule in -- at Fosterville, that's where you had been planning at this time?

Philip Yee

Yes. That's correct. It's in line with schedule.

Stephen King

Just a little more detail on the rigs, you had mentioned there was 15 rigs turning, so are they all at Fosterville?

John Landmark

Steve, it's John here. There's 5 rigs in the northern territory and the 10 in Fosterville, of which the 10 in Fosterville, 5 respectively mine infill drilling and in the other 5 are exploration.

Stephen King

And the final question to Doug. The drill results earlier this year at the SMC, you had talked about a parallel zone. We had sort of 2 concepts there, obviously extending a long strike, but there are some interesting results from a parallel zone. Can you add any color on what you've seen in drilling subsequent to that or what's your feelings on that intercept and the exploration concept there?

Douglas Cater

Yes, Steve, thanks for that question. What you're talking and referring to is the lower SMC. So we've been there, we had multiple mineralized zones, we had in the hanging wall and we've been actively drilling that target using 3 rigs, 3 underground rigs on the 5,300 level. We're just compiling the results as we speak.

Operator

Your next question comes from the line of Dan Rollins of RBC Capital Markets. Your line is open.

Dan Rollins

I was wondering if you could comment on given now that you're getting in close to the Swan zone then the reserves, what do you think the sustainable level of production out of that zone could be on a per day basis with respect to those mining and more importantly the ability to process that effectively through the mill?

Anthony Makuch

So those are some good questions, Ian, would like to give a little color there.

Ian Holland

Yes. So there will be some time to -- I guess to ramp up to a full production in Swan. And it does require some very detailed and careful scheduling given the hard grades to make sure that we fully extract. So I wouldn't necessarily want to provide a number as such, but we're certainly looking to ensure that we both maximize the [indiscernible], but also maximize the recovery -- the mining recovery. So the extraction stepping across to the processing plant, I'm certainly comfortable to say that we are looking at some capital improvements in 2018, in terms of increasing the gravity circuit to ensure that we're positioned to be able to cope with and maintain the very high recoveries that we're receiving now with any sort of change to over the mix, but I think we're comfortably placed for that.

Dan Rollins

Okay, maybe I'll ask it a different way. If I were to look at the split of reserve tonnes at Swan relative to the rest of the reserves excluding the CIO residues, is that proportion is split something that you think it's feasible to put through the mine or would it be a little bit less than that?

John Landmark

Yes. That's a reason we're sort of -- calculation to make.

Anthony Makuch

Yes. It represents about 50% of the current reserve times and probably be at that kind of rate or close to maybe little bit higher at times, but I think that what you should expect.

Dan Rollins

And then moving on to Macassa, obviously you're getting deeper there, what are your thoughts on potential putting another shaft in there and be able to start to push the throughput higher, and I'm not sure, if you guys are looking at any studies on that, but just trying to get some color on when we might be able to get some information on that, if that's still something you're looking at?

Anthony Makuch

Yes. We are actually doing the engineering work and detailed cost estimates schedule on a shaft. We've done some work in terms of site selection and scope and sort of what we expected it to look like and where it would be. We're not finished that work yet, we are planning for something towards the end of Q4 here, maybe by December or early January to give something a little bit more color about what we're plan to do with the shaft at Macassa. And now the goal here would be the effectively build a new mine in Kirkland Lake as this comes on stream.

Dan Rollins

And I don't mean to jump around, but just at Fosterville, I think you're running around 67.5%, 70% of capacity in the mill. When do you think you would be able to start pushing that tire? So that is all dependent really on getting that the extension that drifting between here at your South and the Swan zone area or the lower Phoenix?

Anthony Makuch

Maybe I'll just give a color, in terms of mill throughput capability, we are looking at trying to increase throughput and that is part of development, Ian, give you a little bit more color on that, but we have to be cognizant of the fact that we have a -- we may have a grinding and a crushing circuit that will deliver at those rates, but our gold recovery circuit, we'll have to be cautious as the grades are getting much higher to ensure that, that is actually a throughput level for this year carbon columns and our whole leaching circuit et cetera. So Ian, do you want to -- you can give a little more color if I miss some.

Ian Holland

Yes. Thanks for all that. There is another factor apply as well and in terms of increasing tonnage out of the mine. The strategy is to open up additional production fronts. So accessing the reserves at Harrier South are a key priority in that, and the potential for a zone at low Phoenix North up plunge from the Lower Phoenix system. So if you're drawing from multiple areas and not so concentrated. There are other factors apply as well including our ventilation upgrade that's underway. So there's a number of things there that need to be worked through before we can really look to increase output from the mine.

Anthony Makuch

We're also -- many, many back processing for the mine.

Dan Rollins

So, nothing urgent given you really don't need it, when you got the Swan sitting there, but once you start getting through most of that's Swan, if it doesn't continue, which right now looks like it could, then you have the ability to start to push this down the road, but really pushing it hard right now could end up hurting recoveries.

Anthony Makuch

Yes. But you got to recognized, so we are doing engineering for -- as Ian talked about for opening up new headings in the mine, we're looking at improving ventilation and getting ventilation down deep as this Swan Zone is going deeper. We are looking at backfill systems and we will be looking at our mill circuit and our mill plant in order to be able to address what everything's it maybe to handle the higher grade ores, if we see that to be a potential bottleneck in the future.

Dan Rollins

And one last question from me and [indiscernible] come on. But Phil, just given the amount of cash flow that Fosterville is currently kicking out. Where do you stand on the tax situation there? I think you guys had a pretty sizable tax shield going into the acquisition, but I'm assuming you're heading through it fairly quickly, could you just give me a comment on how much you've got left to shelter [indiscernible]?

Philip Yee

Sure, Dan. You're asking specifically about Australia?

Dan Rollins

Yes.

Philip Yee

Okay. So Fosterville in 2016 utilized a large portion of the Victoria Holdings tax carry-forward to offset taxes owing in 2016. So there's about $6 million in unused tax loss carry-forwards left for Victoria Holdings. On the Northern territory side, there is about $250 million accumulated to the end of 2016 and unused tax loss carry-forwards. And the Northern territory as you know is now, it's been put in care and maintenance as of June. We are looking at different options. As Tony mentioned, we're looking at, perhaps a longer term life of mine. But we are also -- it's a fairly large amount of unused taxes. So we're looking at within Australian tax law, if we can find a way to restructure and our taxes and how the tax losses utilized by the Victoria Holding side of the business by Fosterville, that process is ongoing still at this point.

Dan Rollins

Okay. Great. Thanks very much for the color.

Operator

Your next question comes from the line of Steven Butler of GMP Securities. Your line is open.

Steven Butler

Guys, question on the 23 grams per tonne in the month of October, I guess that's a positive reconciliation. Can you tell us roughly speaking, where you expect to the grades to be from the stopes mined this past month?

Ian Holland

Yes. Thanks for that. Ian here, in terms of the overperformance, so we did expect the grade to be higher in October than the Q3 run rate. But it did overperformed and I'll give some color to the numbers, so the stope that overperformed -- the stope that underperformed in Q3, we expected to be in the order of 75 grams over a 4,000 tonne, 5,000 tonne panel and it came in at 25 grams. We haven't got fully reconciled numbers for the October and contribution that was essentially the opposite. So that in combination with other high grade such which were expected to be high grade, plus some high grade development really drove it, so [indiscernible] performance, but coming from a -- what we expected to be a higher base.

Steven Butler

John at that mine, again you guys cheesed us with the presentation, webcast streaming through as we couldn't print it out. But the down plunge drilling on Fosterville Swan Zone, how far down plunge have you drilled beyond the resource limit so far and maybe hit or not hit the zone?

John Landmark

Yes, Steve. If you look at the current resource outlined, there is a little rectangle just to the south. It was on the very long section little bit to the left. That would be about 150 meters, there's two holes there that help to find the resource. And what we -- some of the drilling that we've done in the last month has tried to infill that gap and we still working on that. So that would be about as far as south as we've gone. If you look at slide 22, that's where you see that. And the step out green disks those will progress through this year and into next year as we take 400 meter step outs, but we still back it up with about 100 meter space infill drilling.

Steven Butler

So, so far results that you have released potentially pending shortly, will be mostly infill -- resource infill?

John Landmark

No. That's still be regarded to exploration. Yes. That's definitely be exploration, there are more than at least 100 -- the section that we recently completed was 100 meters south of the main Swan Zone.

Steven Butler

And guys at Macassa, so good performance on productivity, and is there more to come in the fourth quarter and beyond, as you continue to optimize or replace some of the fleet maybe any magnitude direction you think on site cost per tonne changing into the fourth quarter and the first quarter in terms of magnitude?

Anthony Makuch

Hi, Steve. Short answer is, yes. If you look at the last quarter, we were at about 1,000 tonnes per day, and we're forecasting improvement of 5%, 10% from that. So in quarter 4, we should see a definite improvement in tonnes per day, which will impact your cost per tonne and the rest of it.

Steven Butler

What did you guys do in terms of truck fleet, what's example of changes that you made there?

Anthony Makuch

Well. So some of the tucks, we're getting a little bit long in the tube, so reliability goes down a little bit, maintenance goes up. So by switching old equipment with new equipment, we increased reliability and we were able to decrease our cost in Q3 regarding maintenance. So not just labor, but parts as well.

Operator

[Operator Instructions]. There are no further questions in the queue at this time. I'll turn the call back over to Mark Utting for final remarks.

Mark Utting

Thanks very much, operator, and again, thanks everyone for taking part in the call this afternoon. As you've heard, we have a lot going on, we've had a good third quarter, and we're off to a very good start in the fourth quarter. We will have our -- you have heard we will have some more news flow before the end of the year, then we'll have our production results out early in the year and I think based on how things are going, we're certainly looking forward to getting that news out into the market. So thanks again for participating, and we look forward to our next call. Thanks.

Operator

This concludes today's conference call. You may now disconnect.