Golden Star Resources Ltd.
Q3 2017 Earnings Call Transcript

Published: 5 Nov 2017

[Operator:]

Good morning. My name is Denise and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Golden Star Resources Third Quarter 2017 Results Conference Call. [Operator Instructions] Thank you. Sam Coetzer, President and CEO of Golden Star Resources, you may begin your conference.

[Sam Coetzer:]

Thank you, Denise. Good morning everyone. My name is Sam Coetzer, as you heard, the President and CEO of Golden Star Resources. Firstly, thank you much for dialing into the call this morning following the release of our third quarter results yesterday after the market close. Firstly, I want to thank all of the Golden Star team for their dedication to delivering our key milestones over the last three quarters. I think all on this call will agree that the team is continuing to pull the proverbial rabbit out of a hat. I visited both our mines two weeks ago with our Chairman, Tim Baker and another of our board members, the Honorable Mona Quartey. We all felt that we can be truly proud of what this team has achieved. Our two cornerstone assets will begin 2018 in good shape and they are delivering the results that we promised a few years ago. We've built a strong foundation and now we have to prove its potential for future growth. Both board members were very pleased with what they saw at their mines and they made excellent recommendations for the future. So now let's recap on our current status and take a look at our performance over the past quarter. This page, please take note of the disclaimer. And now let's move on to the next slide. Joining me on this call is Andre van Niekerk, our Chief Financial Officer; and Katharine Sutton, our VP of Investor Relations and Corporate Affairs. You'll see Daniel is not with us today as he is celebrating a milestone birthday and I want to congratulate him on this. He has been a true great friend of mine and doing well in the company. After the presentation there will be an opportunity to ask all team members, but first, let's turn to the Golden Star snapshot. As you know, Golden Star is a West African focused gold mining company with two producing mines in Ghana. Our assets are situated on one of the world's most prolific gold belts, the Ashanti, in a very favorable mining jurisdiction. This year we expect to produce between 255,000 ounces and 280,000 ounces of gold and all-in sustaining cost of between $970 to $1,070 an ounce. However, over the next two years our all-in sustaining costs are expected to reduce further, bringing us into line with our larger peers in the region. Our CapEx budget is still very high this year as we are completing the construction of the Prestea Underground, which I will tell you more about later in this presentation. At the end of the third quarter of this year, we have $30 million in cash, and we remain fully funded to complete the development of the Prestea Underground. The takeaway from this slide is momentum has been generated and Golden Star is a very different company to the one it was a few years ago. Turning now to our performance during the past quarter. In the third quarter, we produced approximately 74,000 ounces of gold, making our 5th consecutive quarter of production growth. It was also the 5th consecutive quarter of record production of the Prestea Open Pits. The quarter was important from a development perspective too as we've blasted the first stoping ore from the Prestea Underground. As the initial stope ore was blasted in late September, it will be realized in our production results for the first time in the fourth quarter. However, the contribution of the Prestea Underground to our production profile still increased this quarter, as we processed more of the mine development ore and produced over 3,000 ounces of gold. At Wassa, production continue to ramp up and the mining team again exceeded the expected daily mining rates. I am so happy to be able to share the following news with you. In the quarter, we are reporting our lowest cash operating cost in seven years and our lowest all-in sustaining cost, since we began reporting this metric four years ago and it is the start of this process. Congratulations to all of my team in Ghana for delivering this impressive result. So now zooming in on details. Our cash operating costs in the third quarter were 30% lower than in the third quarter of 2016 and the lowest cash operating costs reported since 2010. Our all-in sustaining cost per ounce decreased by 26% to $848 per ounce and it's well below the bottoming of our full-year guidance. The primary reason for these compelling cost reductions is the significant decrease in cash operating cost per ounce at both our operations. So now let's look more closely at the performance of Wassa and Prestea, the process being made at the underground developments and our exploration upside opportunities. I'm sure many of you are familiar with Wassa by now, but just to recap Wassa is currently an open pit and underground mine in Southwestern Ghana. In the third quarter of 2017, production was approximately 32,000 ounces of gold, which represents a 42% increase compared to the same period in 2016. It was the first time that gold production from the open pit and underground was equal. The quarter results represent 19% in gold production from Wassa Underground compared to the second quarter of 2017. Wassa delivered strong result in terms of its cost too with a 23% decrease in cash operating cost per ounce to $856 an ounce compared to the third quarter of 2016. The out performance was primarily due to a significant increase in gold sales during the quarter and it's lower than the bottom end of Wassa's guidance for the full year. And as I mentioned earlier in the presentation, Wassa Underground also continued to exceed its targeted daily mining rate. Our target for 2017 was a mining rate of 1,400 tonnes per day. But during the third quarter, we delivered a rate of over 2,200 tonnes per day. In the weeks' time, Katharine is with me now, will be taking 15 analysts and investors to visit both of our operations in Ghana. I'm looking forward to hearing the feedback from this trip. Some of these visitors attended our trip six months and 12 months ago and I think they will be very impressed with a huge progress that has been made. It will also be the first time we've hosted the members of the investment community when both underground mines are producing gold. It's a very exciting time for us all. However, as with most new mines, there is always some wrinkles to iron out at the start. Though the mining rate at Wassa Underground largely exceeded our expectations during the third quarter, the grade of the ore was lower than we were anticipating. We realized that our definition drilling program was not far enough ahead of our production plan to ensure optimal stope designs, especially with the increased production rate. We immediately expanded our definition of drilling program and now focus on geological interpretation in order to gain a better understanding of the ore body ahead of our stope designs. We now have four underground definition drill rigs in operation in the B Shoot. Our efforts have started to pay off as we saw an increase in grade profile through the third quarter and the start of the fourth quarter. These are very encouraging signs and we are confident that the underground grade will continue to strengthen going forward. As a result of our focus on generating cash, we have taken the decision to defer the next pushback of the Wassa Main Pit, which is go to Cut 3. We reviewed the capital expenditures requirement for Cut 3 and we decided and in light of the current gold price, it makes more sense for Wassa to become an underground only operation. Of course, these reserves remain intact from its gold prices. If the gold price rises, we will have the option to commence Cut 3 and increase Wassa's production. However from the start of 2018, we're planning for Wassa to be solely an underground operation focusing on high grade, higher margin underground ounces. We believe this strategy will ensure us to generate most cash flow, allowing us to add cash to our balance sheet and strengthen our financial position. We're targeting a mining rate from Wassa Underground of 2,700 tonnes to 3,000 tonnes per day in 2018 with a potential to further expand over time. And we will be releasing more details about Wassa transition to being an underground only operation during the first quarter of 2018. Now we're going to move on to our Prestea mine. Prestea is approximately 40 kilometers from Wassa and it's also in Southwestern Ghana. Total production from Prestea in the third quarter was over 42,000 ounces which is an 86% increase compared to the third quarter of 2016. The increase was primarily to the 64% increase in grade as a result of the Mampon deposit and Prestea Underground contributing to Prestea's production during the period. It was the first consecutive record quarter of production from the Prestea Open Pits and the team there delivered almost 39,000 ounces, a great result for the company. Prestea's underground production also increased significantly since the second quarter as we continued to process development ore. It was great to see that as a result of the higher grades Prestea cash operating cost per ounce decreased by 38% this quarter compared to the same period from 2016. This brings cost in at $520 per ounce. Looking at the progress we've made at Prestea Underground. I'm pleased to report that two raises are now complete and we are making good progress in the third stope. We have learned some important lessons in the first two raises and these will be applied in the future raises to allow us to progress with our development rate more quickly. A breakthrough between the north and the south side footwall drive has now occurred, which has now exposed the next 13 planned stopes. The breakthrough of the footwall drive will also allow for improved ventilation and greater flexibility in the excavation of ore. The majority for the CapEx of Prestea Underground is now complete, just $3.5 million remaining for the fourth quarter. And the final milestone for the year at Prestea Underground will be in achieving commercial production later this quarter. That will be the last step in our century old mines journey to become a modern fully operational high-grade mine. Moving away from operations, let's look at our financial results and I'll let Andre tell you more about these.

[Andre van Niekerk:]

Thanks, Sam. The continued positive operational results are well reflected in our financial results for the quarter. Revenues increased by 58% compared to the same period in 2016 due to the stronger production at both Wassa and Prestea. However, as Sam mentioned earlier, our focus is on delivering stronger margins rather than just high revenues. So it's pleasing to see that our mine operating margin also increased by 365% to just under $75 million. Our net income was $12.1 million in the third quarter compared to a net loss of over $23 million in the third quarter of 2016. This change was due to a higher consolidated mine operating margin and lower losses recognized on financial instruments. The adjusted net income was $19.8 million compared to $1.1 million in Q3 last year. The increase in the adjusted net income reflects the remarkable increase in our mines operating margin as a result of the higher gold production. Our capital spend was $17.9 million for the quarter of which $9.7 million was incurred on the development of Prestea Underground. We finished the quarter with $30 million in cash and we remain fully funded to deliver our capital program. We expect to continue to improve our working capital position as we are coming to the end of our capital program and our higher margin underground mines continue to ramp up. I'll now hand it back to Sam.

[Sam Coetzer:]

Thanks, Andre. Now let's talk a little about the exploration in the future of the company. I'll turn first to Wassa. The time has come for Golden Star to realize its upside potential and that's what we have been focusing on over the last few quarters in addition to achieving our guidance. In mid-September, we announced initial drilling results from the Wassa Underground 2017 drilling program. It's the first time we've conducted any significant exploration at Wassa in the past four years. The program took a two pronged approach, focusing on finding ounces we can add to the mine plan in the near term which will further utilize the existing infrastructure and increasing our long-term mine life. The initial results indicated that we can achieve both. We demonstrated the B Shoot which is the heart of the Wassa's underground ore body extends to both the north and south and remains open in both directions. This suggests a much larger deposit than what we originally thought. The slide you are looking at is a long section of Wassa Underground and focuses on the B Shoot South drilling. The objective of this drilling was to ascertain if the B Shoot is continuous to the south. The results of the first deep mother hole we drilled which is shown on the right of the diagram confirms that it is with intercepts including 24 meters and 6 grams per tonne. These results suggest that Wassa could continue production for much longer than its current reserve life. However, we have only received the results of one mother load by mother hole so far and further results are needed to confirm this potential. I'm looking forward to releasing them later this quarter. Moving on to Prestea in mid-September we also announced the initial results from the extension drilling program at Prestea Underground. The mine currently has 0.5 million ounces of reserves, but in the past exploration has been hindered by a lack of access. However now that the rehabilitation underground is complete, we've been able to drill from underground. And this work has shown that the West Reef extends to the North offering the opportunity to increase near-term production. As we predicted it remains open in that direction and it dips downwards. We have also drilled 23 holes in an in-filling program and its continued to confirm the high grade nature, strong continuity and the thickness of the ore body. Throughout the rest of the year we expect drilling to increase as now the new infrastructure is in place and we can move drills in without impacting production. The slide you are looking at is a long section of the northern area of Prestea Underground, showing the Central Shaft on the left and the West Reef ore body on the right. The extension drilling we've done so far is just the beginning and it was conducted from within the mine workings. However, by mid-November, we will have constructed a new drill chamber to the north of the current West Reef 24 level access. This will allow us to explore the larger longer-term exploration target, which is a down plunge extension of the West Reef. And this drilling is represented by the green and the red lines on the slide. It will also help us to gain the better understanding of the potential to increase Prestea's annual production rate and potentially extend its life of mine beyond the current 5.5 years. Moving on now to opportunity for expansion and the key milestones we have ahead. When we started developing the two underground mines, we decided to build in more capacity than we originally needed in order to allow us to grow our production profile in the future. At Wassa the target mining rate of the feasibility study was 2,200 tonnes per day. However we engineered the decline to handle 4,000 tonnes per day and our plant capacity is nearly 8,000 tonnes per day. At Prestea, the story is similar. The planned mining rate is just 650 tonnes per day, but the shaft has a capacity of 1,500 tonnes per day and their plant capacity can process 4,000 tons per day. This means that without incurring significant additional CapEx, we could substantially increase the production rates at both of these mines. The process is already underway at Wassa as we expand the underground mining rate and transition the mine into an underground only operation for the time being. And once Prestea Underground has hit its stride, we will begin a similar process there. The focus is now on our exploration team to unlock the potential of the ore bodies and further demonstrates the larger scale, longer-term opportunity within both underground mines. At the start of the year we announced commercial production at the Wassa Underground. Then at the end of the first quarter we began mining the B Shoot, which is the high grade area of the ore body and we exceeded plan mining rates. We also commenced mining of the high-grade Mampon deposit ahead of schedule which is contributing to the stellar production from the open pits. At the end of the third quarter, we blasted the first stope at Prestea Underground and in the fourth quarter we expect to achieve commercial production ramp. Also during the fourth quarter, we plan to release further results from the exploration programs. As you can see a lot of catalysts still to come as we move closer to becoming a high grade, low-cost producer and gain a better understanding of our potential growth. At the end of the third quarter, we are on track to achieve our consolidated full-year 2017 guidance on all stated metrics. This chart would look somewhat different next year as we become an underground focused producer of both operations. And we will deliver the strongest cash flow for us and further reduce our risk profile. At this time, I will thank you very much for listening and I will take some questions, Andre and myself. I'll hand back to Denise to take us through the questions and answers.

[Operator:]

[Operator Instructions] Your first question comes from Nana Sangmuah with Clarus Securities. Your line is open.

[Nana Sangmuah:]

A couple of questions from me here. I noticed that in your disclosures you highlighted that at Prestea Underground the grades that you guys are encountering seems to be higher than the reserves. Should we be adjusting our models to account for that. How would you guide as going forward?

[Sam Coetzer:]

No, I wouldn't advise you to adjust. We know the grade profile. Where we started the production profile will be at slightly higher grades than the average reserve grade. So over the period of the reserves, you'll get stopes that will be slightly below and slightly higher. I am encouraged that we see the higher grades as we predicted in our own model for next year. So, Nana, for the time being until we see that there is a positive reconciliation, then we will adjust. But at this stage I would not. As we're now mining those underground stopes we see the grades in our plant at PO we see the gravity goal increase dramatically at Prestea. And that's the indication that the grades are what we expect, and maybe get a little bit positive bump of gravity goals in this system.

[Nana Sangmuah:]

And still at Prestea, on the Mampon, there seems to be a [indiscernible] given and trying to understand how many more quarters we could be looking at getting some contributions on Mampon. What's being done there exploration wise and should we be expecting some uptick in resources and reserves come end of the year?

[Sam Coetzer:]

So, Nana, we are still in Mampon, but [indiscernible] this quarter, it's basically done. However, I do expect that we will stay in the Prestea Open Pit probably into the New Year. So there is potentially other pits that we will be looking at bringing in with Prestea Underground going forward. Mampon has been really good and its turned out what we expect but I am looking forward at grades from Prestea Underground that's even higher than the Mampon deposit and that's really where I hope to see the next bump in the company's production profile.

[Nana Sangmuah:]

And then moving on to Wassa. This transition to underground slowly would come with some loss of ounces. But I think it would potentially be offset by higher margins. Could you give us some color as to what you've seen for 2018 in terms of total ounces to be produced out of the underground and at what cost or it's way too early to come now with any forecast?

[Andre van Niekerk:]

Firstly, the open pit is deferred. It is not up for seize forever. We internally look at a different gold price with a lower gold price when we make our assessments going forward. We also look at the margin of the contribution at a certain point in time. And the third thing we look at is as we see the production rate increase in the underground, obviously the return, if you want to call it, on the pit at what we have a view of the gold price is not what we would want to take on right now. For us more important is to generate the cash flow that we can see without spending capital on the pushback now. We have a gold price that I would imagine would be the right return for an open pit at running -- probably it's going to run well at about 4,000 tons a day because we are looking around 4,400 tons a day. So the increase that we will see from the underground and the margins we will see from the underground and the gold price that we choose makes it a better option makes it to focus on something that doesn't require capital and can create a meaningful margin. We are finalizing our life of mine plans. We have budgets for next year. And then all I can say to everybody listening is that the margins and the cash flow by running an underground at this point in time is the right decision based on what our gold price view is at this point in time.

[Nana Sangmuah:]

And then just one last question on the exploration front. How many meters are being completed and backlog so far?

[Sam Coetzer:]

You are talking about exploration or definition drilling or which one you are talking about?

[Nana Sangmuah:]

Exploration basically.

[Sam Coetzer:]

Basically we look at the major interceptions. We got those two, we got that first intersection down the Wassa which is a long hole drill. We have got another rig on that area right now. We should be intercepting that. So it's not really about the meters, it doesn't give a fair presentation. And at Prestea Underground now that we have the new drill chambers in the operation is running well that we've caught up with all the waste development, we can do the drilling fairly easy. So I think we are sitting around about 7,000 meters of the B Shoot south and ran about 4,000 meters at B Shoot's nose. So, yes, to count meters is not -- it's what we want to intersect that's really important because some holes are much longer, Nana, than the others.

[Operator:]

Your next question comes from Raj Ray with Desjardins Capital Markets. Your line is open.

[Raj Ray:]

Just a few questions from me here. The first one, Sam, can you give us some color on the unit costs you're seeing at Wassa Underground, particularly related to mining? I mean, the feasibility study was done at around $43 a tonne, if I remember correctly U.S. So is the mining cost coming lower than that?

[Sam Coetzer:]

I think it was $48, if I was right in the feasibility study. We are -- Raj, I don't want to guide on that but we are seeing close to 20% lower than what we predicted and that's only because of the high productivity that we see in the underground mine. I want to see a few more quarters at that rate before I would guide you to different numbers. But we've got a fantastic team and the ore breaks, the ore body breaks very favorable to us now. And that's why we have also indicated that we bought 4 trucks that are arriving this quarter to increase the production rate from underground. Now that we solved the problem that we had with the stoping grade, let's say the interpretation of what a stope design should look like, we're now fully running the mine at lower cost and we've seen the grade increase.

[Raj Ray:]

And with the reduced throughput at the mill at Wassa, I mean, how should we look at allocating the fixed cost? Should we assume increase in the processing unit cost as a result of that?

[Sam Coetzer:]

Yes, what makes Wassa so unique, I think most new mines that get designed would have one big SAG mill to do most of your grinding in the front. What makes Wassa so unique it has two ball mills and a crushing unit. So we can shut off one ball mill and reduce that cost and run in the rest of the plant through reduced tankage and see a reduction in the cost. So cost per tonne staying very similar to what it would have been at the other one. So, Andre, I don't know if you -- we haven't done a detailed -- we are in the midst of making sure that we understand it. But basically the advantage that Wassa has is the two ball mill scenario. Andre?

[Andre van Niekerk:]

Yes, I think as have indicated we will provide more details about what we see Wassa is going to look like Q1 when we provide our consolidated guidance and our guidance for next year. So we -- of course there is a fixed cost component that we're looking at. And I'm going down to Ghana next week. We are going through the plans and make sure that we get those costs allocated directly.

[Sam Coetzer:]

The fact remains that we have two ball mills, so we can reduce it with a efficient cost profile.

[Raj Ray:]

And, Sam on the Wassa Underground grade, and I know you mentioned that you've seen grades pick up in the first month of Q4, can you give some color as to where you're seeing the grades currently or is that too early?

[Sam Coetzer:]

I'm going to give a bit of an explanation, yes, because I saw some notes this morning. When we entered into the first few big stopes at Wassa in the second quarter, we expected a certain grade in our processing facility after we designed our stopes. And obviously it's very quickly to see the grade didn't pick up in the processing facility, and obviously we -- you got to understand why when you predicted a certain grade if it wasn't going to be there. However, by then you blasted those stopes, and you've got the ore moving out very rapidly, because you locked into a design of the stope. Only when you're done that there is basically two things that can go wrong, the one is you have over-broke and you've mine dilution or you misinterpreted the shape of the stope. So once we got the ore out of the two or three stopes, we could do the CMS, which is a cavity monitoring system and we could look at the designs of the stopes. And we broke perfectly as we designed it. So we know at least that the drilling that we do and the design of the stopes, they were right. It then led us to, how do we interpret, because these are large big blocks we used a leapfrog model and the leapfrog model indicates to you what this stope should look like. On interrogation of that we noticed that we had some sneering across and we had to put new constraints into our leapfrog. We adjusted that where we send it back to the engineers, Martin and Mitch did lot of work. We got some other people to advise us on it as well, external. And the moment we put the constraints on the leapfrog, we designed according to the new shape that we have, which are still very large stopes but that has a better correlation. And immediately as we got that we saw the increase in the grades by the end of the second quarter and it continues into the fourth quarter in the plant. We are also following that now with muck samples and we can see the muck samples coming out is resembling what we expect. So once these stopes are completed, we do the reconciliation. We'll go back to do the CMS, do the reconciliation. But what gives me confidence is that the interpretation of the leapfrog model is now in a better place than what it was. This is not uncommon, Raj, and I've started to few [bulk] mining and you learn from the ore body, but most of all because you're running so fast. It's the interpretation of the models that you use to make sure that you cut the stope correctly. Now I hope that answers -- it's a long answer, but it might give you more clarity.

[Raj Ray:]

I appreciate the details, Sam. That's great. And just got couple more last questions here. On the Wassa Open Pit, is there a gold price that you're comfortable with and can you remind me what the CapEx was for the pushback three?

[Sam Coetzer:]

So what we -- it's early for me to say because I am looking at potentially -- what I want to understand for Wassa as a mine in totality is what is the final throughput of the underground going to be, is it closer to 4,000, is it closer to 3,000. So -- because once you put that rate into a plant, you're taking return away from the open pit. So at this stage, it looks like [1,350], but depending on what I see, how well this underground produces, it's all going to be about what is the right rate that we want to return from the open pit. So we are working on those numbers and I'm just giving you a rough indication. And our long term -- the price we do return internal to the company is not consensus, it's lower than the gold price that you will be using.

[Raj Ray:]

And what was the CapEx that was estimated for the pushback?

[Sam Coetzer:]

Andre?

[Andre van Niekerk:]

There has been various situations and designs on that respect. So -- I mean, I think the best number that you can use is probably what was in the feasibility study. And have a look at that, but yes, the redesign, it looked at optimizing it. So in the end it, as I mentioned, it looked like the -- in the short term, much higher margin coming out of the underground than even doing the open pit at this stage.

[Raj Ray:]

Then one last question for you, Andre. So a part of the current accounts payable that was deferred in 2016, I think there was around $25 million that gets paid from 2018 onwards. How should we look at that getting repaid? Is it going to be repaid quarterly over the next two years or is there -- okay, that just the way we should be looking at it?

[Sam Coetzer:]

Yes, $24 million, and that $24 million is included in our long-term debt. And we would be paying it quarterly, $3 million a quarter over two years starting in the first quarter of 2018.

[Operator:]

Your next question comes from Cosmos Chiu with CIBC. Your line is open.

[Cosmos Chiu:]

Just a few questions from me here. Maybe let's touch on Prestea Underground first. Sam in terms of that 16-gram per tonne grade for the first three stopes, does that include dilution, because I was reading about the MD&A yesterday? You mentioned that you're taking some of the stopes, the raise development and ore. I'm putting that through the mill. And it sounds like the west of those Alimak raises are wider than what you're expecting for a normal stope. You're taking some of the waste. So is that 16 gram per tonne. I guess what I'm trying to get to is, what's the head grade that's going through mill?

[Sam Coetzer:]

We only do the head grade mill. So what we -- when we back calculated what was the grade in those -- from the stoping rise, it would have been 16-gram a tonne. But it wasn't the dilution in the quarter, including -- in the third quarter, I'm talking now, when we had some of the waste that we couldn't get separated from the ore. So in the plant, we would have probably seen 5-gram, -6 gram a tonne on that diluted grade. But going forward we expect the grades from the stopes now that we started supplying from the stope, to be a preserve grade will be higher.

[Cosmos Chiu:]

So, Sam, on a go-forward basis you won't be taking any of that ore coming from the race development. Is that what you mean?

[Sam Coetzer:]

Yes, I don't know what you mean. But we have got so much flexibility now. We can run most of this shifts just on ore, which we do now where you can see the increase of the production rate of the ore. And then on the back shifts, you're talking about 120 to maybe maximum 120 tonnes of [indiscernible], I mean that's a grade of 5.5 and it's broken. We can separately take that out of the mind. So it's still base. It will be additional tonnes for us, that's basically are there.

[Cosmos Chiu:]

And, Sam, could you remind me again, are you -- are the raises being developed, the Alimak raises, are they being developed in ore?

[Sam Coetzer:]

Yes, okay let me remind you. Okay, all Alimak raises are developed in ore. So the first one did that. And we blasted -- the stope is being blasted on a regular basis now. The second one is complete, the third one is we're done within this. On the fourth stope, the raise just started. And we just completed the mix of the 5th. And as I indicated, the waste development is exposed at all 13 stopes going forward now. So, yes, once we got waste locked as I indicated with water problems we had, but all that waste is now underground. So the kind of waste you're talking about is just that the raise is wider than what the stope would be the rises of it 2x2, when the stopes are going to be at 1.8, but it's in our calculation of our reserve grade.

[Cosmos Chiu:]

So that the waste that you're getting from the raise, raising up being wider that's being included in your 16 gram per tonne or is it not?

[Sam Coetzer:]

Yes, I don't know this. Yes, I think that's all included. I can verify that number, but that is about the -- that's what we see the raises that will come out now. Yes.

[Cosmos Chiu:]

That was my question in terms of, because I understand that you're taking some ways as you go up the raise, as you develop the raise, it doesn't seem like you're completely separating out that waste. I just want to make sure that's been included in your calculations in terms of your grade that's coming out.

[Sam Coetzer:]

Yes, well it's a yes and no. So the grade of the stope will be 16 gram a tonne, the grade of the raise would be..

[Cosmos Chiu:]

11.5 gram.

[Sam Coetzer:]

I'm trying to -- I can give a better explanation on that, but really stopes is looking at 16 gram a tonne, if you take stope only, but we always have a raise that has some dilution to it.

[Cosmos Chiu:]

I got it. So it's going to be the -- the ore that's going through the mill is going to be a combination of what's in the stopes, what's in the raise. We should take a combination of that. So 16 gram per tonne likely, it sounds like it's a high end, will likely have to take into consideration that some stope or some raise ore is coming through as well.

[Sam Coetzer:]

Yes, but that's not much less. If you can see your mining stopes now and you're having a lot of tonnes coming from the stope and the raise blast today would probably put 60 tonnes, 1 raise blasts 60 tonnes to 100 tonnes a day. You can calculate two by two by about a 1.8 meter within this. So you can see that it's very limited amount that it will dilute that because it has grade in itself.

[Cosmos Chiu:]

And is that going to change as you have more raises, because in the end, you will have five different raises going up, right? Is that proportion going to change?

[Sam Coetzer:]

No, unless we want to increase the rate to higher, but that calculation is the 14.3 gram a tonne for the reserve. That has all the raises the way that we run it.

[Cosmos Chiu:]

Okay. I got you.

[Sam Coetzer:]

All included, to separate and tell you what the raise is [indiscernible] raises that run rate say 25 gram a tonne for a period. But you've got to look at the total ore body and they'll always be the raises that go up with a 2 meters by 2 meters, and then don't contribute a lot of tonnes going forward.

[Cosmos Chiu:]

And then maybe switching gears a little bit, Sam, in terms of Wassa Underground, my understanding here is that this is a sub-level long-haul mining method in itself isn't highly selective. There was a big gap in terms of the grade, 2.61 gram per tonne versus your reserve grade at over 4 gram per tonne. Is that a fair comparison? And it sounds like definition drilling has been pinpoint as one of the issues in terms of turning the grade around. Is that in itself sufficient for you to fill that gap or increase the grade back to reserve grade or were some of those blocks that were mined out in Q3, were they lower grade anyways?

[Sam Coetzer:]

No, I think, I explained it earlier. Cosmos I'll try to do it again. When we started with the quarter, we did stope designs on the interpretation of the ore body. We use a model that we call the leapfrog model which allows you to put stope shapes to the ore body. So we put those stope shapes in and then they were fairly big sized stopes. So once we mined, we expected the grade in the plant to be better than 2.61, but we expected it higher than that. But we saw the grades then pick-up. Obviously, now you have to wait because there's two things that can go wrong when you're involved in mining. You could either over-break so you think you're drilling a stope with a certain shape or your interpretation when you laid out the stope was wrong. So mostly once you have locked into the stopes, you've got to get the ore out. Once it was out, we could do the CMS, and I think you know what is CMS is, it's a [Indiscernible]. So once we did that, we saw, oh the stopes, the drilling broke exactly to the design. So the drilling was perfect. [Indiscernible] and question the interpretation that the leapfrog model tells us about what the shape of the stope should look like. We then saw that the interpretation at number one, it smeared some of the holes out and off course then we basically had dilution in our stopes because although they drilled it perfectly, it wasn't interpreted right. We put new constraints to the leapfrog model on a more local basis. We also had external people come and advise us. We re-looked at drilling more details, so we can do the interpretation of the stope designs better. And once we did that, immediately the next stope came out with much increased grades. And the ones that we currently I can see their grade in the plant increasing as well beyond what we've seen before. So indicating to me that we're getting the stope designs much better. So I think we are refining the grades, all the stope designs to the interpretation better.

[Cheuk Chiu:]

So we should see better grades at...

[Sam Coetzer:]

I said our reflection when we did our review of the stopes would put more dilution than we should have, now that we know the interpretation is different.

[Cheuk Chiu:]

And what kind of dilution have you -- mining dilution have you factored into your reserves?

[Sam Coetzer:]

Well, in the large stopes very little external, but I think it was 10% internal or 10% to 15%, I can't remember the exact number, but there is a calculation in it. So the first stope obviously was much more than that. Now that we have the interpretation, I feel very comfortable now what I see in the grade profile coming through the plant now.

[Cheuk Chiu:]

So with the better a interpretation, you believe that you're getting closer to that 10% sort of internal dilution?

[Sam Coetzer:]

Yes, you see I have seen this before in our mines -- ball mines before. Once you get into it, things happen, you drill, then leapfrog, make the interpretations, you put your stope designs to start mining and over the time you get better at interpreting what your ore body tells you. And I think we will be -- you'll see the end of it once we go through Q4 that there will be a dramatic improvement.

[Operator:]

Your next question comes from Andrew Breichmanas with BMO Capital Markets.

[Andrew Breichmanas:]

I think I'm actually getting more confused, so I was just wondering if I could focus on a couple of numbers and maybe try and compare to the feasibility study or something. The Prestea Underground, the grade that you're expecting next year and the feasibility study would have been around 14.7, 14.8 grams per tonne. Is that's still what you're on track for next year? And on the cost side, we should be assuming that they are around the feasibility study level which is all-in including mining processing, G&A, everything else, $200 a tonne, is that fair?

[Sam Coetzer:]

However, plan might be running a bit lower because we will still mine some Prestea Open Pits into the new year, and so it might extend a little bit longer. But the mining cost would be exactly as where you have it.

[Andrew Breichmanas:]

And likewise on Wassa, we're talking about sort of 4 to 5 grams per tonne and on an all-in basis, maybe say $60 tonne, including like about 45 to 50.

[Sam Coetzer:]

Yes, 45 to 50 is what was in the feasibility study, however with the increased rate it could be lower, 45 to 50 and then we had about I think 16, 17 on processing in about 5 on G&A.

[Andrew Breichmanas:]

I mean I think everybody is just trying to understand that as operations shift underground, how the different components of the mines are going to be looking into next year. So I think that kind of detail is very helpful. Thank you.

[Sam Coetzer:]

Thank you, Andrew and you're right. So we look at these things, we're not married to one life of mine plan, we are disciplined in creating cash flow and fixing up the company. And we have a lot of labors, still as you know, we'll probably have some more ore through the plant at Prestea, we also have some stockpiles at Wassa that we will continue to work on and we're looking at all the other ore bodies around Wassa [and that's all]. But at this stage, what I want to indicate, this company has two cornerstone assets, and we will be working into them to make it a stronger company. Then above the line with the capacity is where we will fall additional tonnes from time to time in the company.

[Operator:]

[Operator Instructions] Your next question comes from Robert Reynolds with Credit Suisse.

[Robert Reynolds:]

On the potential to extend mining from the Prestea Open Pits into 2018, could you just give us the names of the pits that you're looking at potentially extending?

[Sam Coetzer:]

I will give you the names, I have over the last few years moved away from all these complex names that the company used to have in its past, but it would be Tuapim and Bondaye, Beta Boundary. Those are the two that we've added. Beta Boundary and Tuapim. And then obviously we've mined faster than we can process, so we still have some stockpiles that we will put through into the new year.

[Robert Reynolds:]

And I guess on Mampon, you're still mining there or are you still processing ore that had been previously mined and it's not stockpiled?

[Sam Coetzer:]

We're still mining there, but we're nearly done. I mean you can think of it as done now. We're still mining there, but we will -- but we have some stockpiles that we will move through going forward.

[Robert Reynolds:]

And then just going back to the Wassa Underground grade. You mentioned the interpretation I guess in the leapfrog model, had a bit of smear into the drill holes. Is that something that you have to look at or plan on looking at in the resource model as well or is that just specific to your stope orientations?

[Sam Coetzer:]

Well, it's a little bit of both, I guess. Once you get into a new ore body, you do an initial resource model obviously, looks at such things globally and once you get into the final detail of stope designs, it becomes critical that you design the stopes accurately. But it's more not putting a global constraint, but more local constraint on your stopes. So we know internal to the ore body, [indiscernible] constraints, but the global picture is still the same. But when you get into the stope designs, you've got to look differently than what you look at the global. On global, we can see addition of ounces when we come and we drill we find more, but in terms of our stope designs, we're just putting different constraints. This is not uncommon when you start to mine to make sure that you understand how ball mining is the best to design for that.

[Robert Reynolds:]

And then, I guess what was the resource model predicted for the stope grades in Q3? Like, what's the comparable number to the...

[Sam Coetzer:]

The resource model was a different cut-off. The reserve would have predicted somewhere between 3.7 and 4.5.

[Robert Reynolds:]

I think you might have answered this in Andrew's question, but could you provide the open pit mining cost per tonne at Wassa either in Q3 or year-to-date, whatever you have?

[Sam Coetzer:]

Andre, can you have the cost per tonne for the open pit? $3.80. I think it was about $3.80 as we dig deeper into the pit it went up a little, Robert. It's always deep in the bottom of the pit than it is in the shallow areas.

[Robert Reynolds:]

And just -- I guess the Prestea mill, do you have on a dollars basis what that mill cost to run in the most recent quarter?

[Sam Coetzer:]

Andre? We're running…

[Andre Van Niekerk:]

$20 a tonne…

[Sam Coetzer:]

About $20 a tonne Andre tells me. I don't know -- you wanted a dollar per tonne or total dollars?

[Robert Reynolds:]

I mean I can calculate it from the dollar per tonne. That's fine.

[Operator:]

Your next question comes from Simon Gardner-Bond with Peel Hunt. Your line is open.

[Simon Gardner-Bond:]

I've just got one question. I'm glad to see that operations are going well and perhaps here, Sam your comment about realizing your upside potential. So my question is just on, if you have any solid guidance on how much you're going to be spending on exploration going forward, whether that's -- and you can just give a direction, if you wanted to, whether that's going to increase significantly or marginally?

[Sam Coetzer:]

It would be, at least what we have allocated this year. We are based on success. So if we see any of these results show that we in the short term can increase through reduce the drilling, but you can work on what we've allocated this year and early next year we will be updating -- based on what we see on the results, we will allocate more or less whatever the case would be.

[Operator:]

There are no further questions queued up at this time. I'll turn the call back over to Sam Coetzer.

[Sam Coetzer:]

All right. Thanks everyone for listening and Katharine is looking forward to thank all of those that were on the call or some that want to see the site. And I am excited to hear your views after you've been to site next week. Thank you very much for dialing in and we will talk next quarter again.

[Operator:]

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