Kirkland Lake Gold Ltd.
Q2 2018 Earnings Call Transcript

Published: 2 Aug 2018

[Operator:]

Good afternoon. My name is Tessa, and I will be your conference operator today. At this time, I would like to welcome everyone to the Kirkland Lake Gold Second Quarter 2018 Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Mr. Mark Utting, Vice President of Investor of Relatons, you may begin your conference.

[Mark Utting:]

Thanks very much, operator, and good morning everyone. With me today are many members of Kirkland Lake Gold senior management team, including Tony Makuch, our President and Chief Executive Officer; Phil Yee, our Executive Vice President and CFO. Our two country operations heads, Pierre Rocque, Vice President, Canadian Operations; and Ian Holland, Vice President of Australian Operations; as well as our two Heads of Exploration, Doug Cater, who is Vice President of Exploration Canada, and John Landmark, Vice President of Exploration Australia. Out there is several other members of the management team in the room as well. Today, we'll be providing comments on our results for the second quarter and first six months of 2018. Tony will review the key consolidated results and then take a look at our performance against our guidance. Phil will then discuss our financials in more detail. In Holland and Pierre Rocque will then discuss the operating results from Australia and Canada respectively. And finally, we will have Doug Cater and John Landmark review recent exploration results, which we have released to the market. Following the presentation, we will open the call up to questions. The slide deck that we will be referencing during the call is available on the Web site at www.klgold.com. And also the Web site link is on the home page as well. Before we get started, I would like to direct you to our forward-looking statements on slide 2. Our remarks and answers to questions today may contain forward-looking information about future events on the company's performance. Please refer to the detailed cautionary note in slide 2 of the presentation and forward-looking information set out in the news release dated August 1, 2018 and the MD&A for the three and six months ended June 30, 2018. Also during today's call, we will be making reference to non-IFRS performance measures. A reconciliation of non-IFRS performance measures is available in the MD&A for three and six months ended June 30 as well as the press release. Finally, please note that all figures discussed today are expressed in U.S. dollars, unless otherwise specifically stated. And with that, I'll turn the call over to Tony Makuch, President and CEO of Kirkland Lake Gold.

[Tony Makuch:]

Thanks Mark and good afternoon everyone on the call. As always I'd like to start by thanking the people of Kirkland Gold with the team what drives our company success. We've got a lot of success this quarter, a lot of people working very hard in Canada both in Taylor mines and Macassa mines, had some solid operating performance in the quarter. Somewhere down in Australia, Fosterville a really strong -- strong performance that's a reflection of the hard work of the people and we've had exception like [indiscernible] success at Fosterville on the exploration side; exploration teams had a lot of good results happening and NT we're not talking them much about what's going on NT but -- people working pretty hard in the Northern Territory and we had some pretty good exploration success in Canada among lot of areas particularly Macassa, so thanks everyone for your hard work and really appreciate what's being done. Beginning on Slide 4, I will start here and looking at the second quarter 2018, I guess you can sum it up that we had two of the -- two of our -- the world's highest grade gold mine perform extremely well in the quarter. Macassa had a record quarter production, with grade of 21.5 grams per ton, cash operating cost well below target. At Fosterville, the mine had one of its best quarters ever driven by record production in June of almost 32,000 ounces. Unit costs at Fosterville continue to be ahead of plan and were significantly better than the previous quarter. Driven by the performance of Macassa and Fosterville, we recorded solid financial results in Q2 '18. And then going out to Slide 5, you can see where we recorded strong growth in net earnings same time last year in the first quarter -- record quarterly cash flow from operations and EBITDA and a significant increase in the cash position to $318 million with no debt. Also for the second time, we increased our dividend with our Q2 dividend in July being $0.03 per share the quarter. Turning to Slide 6, look at our production in more detail. We produced over 164,000 ounces in Q2 2018 which compared to 160,000 ounce for the same period in 2017 and 148,000 ounces last quarter. Looking at the comparison to last year production grew 10%, if you exclude the contribution from mine currently on current maintenance. As mentioned the cost of production of just over 60,000 ounces was a quarterly record and was up 33% from the similar quarter in Q2 '17 and 12% from last quarter this year. The increase from both products there were primarily grade driven, like Fosterville production of 77,000 ounces was similar to the prior year and was at 21% increase from Q1. Like Macassa, the great performance of Fosterville has been excellent. Holt and Taylor, our other two operations did not have particularly strong quarter. I hope we had a planned 21-day shutdown to replace the shaft. This work went extremely well and really bodes -- sets the mine up now for some solid operating performance in the second half of this year and going into next year. The new guy -- we will move on to that. Production at Taylor was affected by lower than planned grades, however, we just completed a very strong July at Taylor and with other grades of probably 6 grams per ton. We expect to perform better throughout the second half of 2013 again at both at Taylor and [indiscernible]. Turning to unit costs has shown on Slide 7, our consolidated cost performance was very strong, operating cash cost per ounce averaged $404 well below our consolidated guidance for the year [442.5 to 450] [ph] and significantly better than both Q2 2017 and the previous quarter. As with production, the key drivers of our strong cost performance from Macassa to Fosterville. Macassa's cash cost were very low averaging $414 per ounce at 19% improving year-over-year and 17% better than Q1. Again grade is a key driver for the improvements. Cash cost at Fosterville averaged $239 an ounce as compared to $220 in last year's second quarter and with 17% better than $287 in Q1. Cash cost at Holt and Taylor were higher then expected as mentioned we expect to see improved results for both operations in the second half of the year and both operations meeting our plans for the year both in production and cost. Looking at Slide 8, all in sustaining cost in Q2 '18 averaged $757 per ounce very much in line with target levels and a marked improvement from $833 in the previous quarter. The improvements from Q1 was mainly driven by Macassa where all in sustaining cost averaged $687 per ounce in Q2 versus $818 previous quarter. We benefited not only from improved cash cost at Macassa but we also had lower stated capital expenditure on a per ounce sold basis. All in sustaining cost was higher than the $729 average in Q2 2017. The increase reflected all in sustaining cost at Holt, Taylor and Fosterville which offset lower cost at Macassa. The increase at Fosterville was mainly due to higher sustaining capital expenditure per ounce sold which are planned for this year and are setting us up for several years of production growth. Speaking of growth, moving to Slide 9, we have a number of growth projects on the go which are all aimed at getting Kirkland Gold to a million ounce value production over the next several years. Slide 9 provides the review of this project where work is expected to ramp up in the second half of the year. Growth capital expenditure for the year-to-date total of $15.7 million, this excludes $12 million of capitalized exploration a significant amount of work in the first half of the year was related to permitting and engineering and in some cases surface work. And Macassa surface exploration for the first shaft is advancing. We are on track to commence shaft collaring, headframe construction and hoist and installation during the second half of the year. We remain on track to commence full set, thinking by the second quarter of 2019 and completion of Phase 1 of this project by early 2022. That's Phase 1 that's with a 54.50 loading [indiscernible] station. We will have the shaft targeted to go down to 7000 feet which would happen following this and would be complete by end of 2023. At Fosterville, the rate of underground development for a ventilation project is increasing. We're making good progress with our water treatment plant. We were also advancing drilling up the surface holes for a new phase plant. The plant construction to commence shortly. We've completed installation of a second gravity circuit at our Fosterville mill with the circuit coming operational as of the end of July. Our timeline for completion of Fosterville project could mean at or close to the original schedule. The actual installation of the gravity circuit is pretty exciting because now potentially going to get a gravity recovery here at the well, it's 50% -- targeting 50%, if any loaded, if this is an ore body which is 3 years ago, it was zero gravity recovery or completely refractory and beginning to gold out in this fashion is really testament to a lot of good work for people but also with the exciting part of how great or ore body we have here at Fosterville. Based on a year-to-date 2018 results, we ended the first half well-positioned to achieve a full year 2018 guidance. As shown on Slide 10, production per year-to-date 2018 of 312,000 ounces compared favorably to our full year consolidated guidance of over 620,000 ounces. Operating cash cost at the end of June with $24 per ounce were better than our target range. Year-to-date all in sustaining cost at $793 well within our guidance of $750 to $800. On a consolidated basis, we are well positioned relative to our guidance for the year and what that indicates that over the balance of 2018 we expect continued strong operating results both in terms of production and unit costs. Increased growth capital expenditures and progress with key projects or as key projects accelerates and a continued strong commitment to exploration where we incurred 44 million of expenditures in the first half of the year, we remain on track of total expenditures of $75 million to $90 million probably closer to the top end of that target. Based on a strong year-to-date results, this morning we announced also improvements in our 2018 guidance which are outlined on Slide 11. Consolidated production is now targeted over 635,000 ounces which is an increase from our over 620,000 ounce previously. Our guidance for consolidated operating cash costs also improved to between 400 to 425 from 425 to 450 previously. At Macassa, we now expect to produce between 220,000 and 225,000 ounces in the year at average cost between 460 and 480. At Fosterville, we now expect to produce between 275,000 and 300,000 ounces of gold at cash cost of 250 to 270. That is an improvement from target production of 260,000 or 300,000 ounces at cost of 270 to 290. With that, I will now turn the call over to Phil Yee, our EVP and CFO.

[Phil Yee:]

Thank you, Tony, and good afternoon everyone. Starting on Slide 13, Tony has already mentioned our strong earnings growth in Q2 2018 and a record operating cash flow. I'll start with earnings. Net earnings in Q2 2018 totaled $61.5 million or $0.29 cents per share a 78% increase from Q2 2017 and a 14% improvement from the previous quarter. However, net earnings in Q2 of 2018 as well as Q1 of 2018 related to continuing operations. In Q2 2017, our results included a loss from discontinued operations about 3.8 million related to the storm line which was sold last December. Compared to last year's second quarter, the main factors driving our stronger earnings growth including increased sales and revenue, lower production costs, higher levels of other income, reduced depletion and depreciation expenses and lower finance costs. For the next few minutes, I will review these factors in more detail. Starting with revenue, shown in Slide 14, revenue in Q2 2018 totaled $214.7 million an increase of 13% from Q2 of 2017. Higher gold sales in Q2 2018 increased revenue by $16.5 million with a total of 164,305 ounces sold in Q2 of 2018. A $44 per ounce or 4% increase in the average realized gold price per ounce contributed $7.2 million to the growth in revenue in Q2 2018 from a year ago. There was also a $1.1 million favorable impact from foreign exchange rate changes. Compared to the previous quarter revenue increased 8% from $198.2 million in Q1. And 11% increase in gold sales from 147,763 ounces last quarter had a 22.1 million favorable impact on revenue in Q2 of 2016. This favorable impact was only partially offset by $5.3 million negative impact on revenue from $32 reduction in the average realized price compared to Q1. In addition there was also a $300,000 reduction related change in foreign exchange rates. Turning to Slide 15, we reported record earnings from mine operations in Q2 2018 totaling $109.5 million, an increase of 45% from Q2 of 2017 and 12% than the previous quarter. The increase from the same period in 2017 reflected strong revenue growth as well as lower production costs largely due to the inclusion of $15.7 million of production costs for the Northern Territory operations in Q2 of 2017. Also contributing to the year-over-year improvement in earnings from mine operations was $3.4 million or 9% reduction in depletion and depreciation cost as the impact of higher gold production was more than offset by a significant increase in the level of the depletable mineral reserves and mineral resources. You may recall we had a large increase in reserves and resources with the release of our December 31, 2017 expense in February of this year. The increase in earnings from mine operations in the previous quarter related to solid revenue growth. The impact of which was partially offset by an increase in depletion and depreciation costs in line with higher production volumes spent in quarter two of 2018. Working away down the income statement. On Slide 16, earnings before income taxes in Q2 of 2018 totaled $90.1 million, a 61% increase from Q2 of 2017 and 17% higher than Q1. In addition to the change in earnings from mine operations other factors contributing to the increase from a year ago were higher other income and reduction in finance costs. Higher other income mainly affected the impact of unrealized and realized foreign exchange gains on U.S. dollar investments, which more than offset a non-cash loss on fair value note of warrants. Lower finance costs related to maturity of our two series of convertible debentures in 2017, one at the end of June and the other in December. As a result, we did not have the interest costs related to those debentures in 2018. Turning to EBITDA, on Slide 17, yield curve we had record quarterly EBITDA in Q2 of 2018. EBITDA totaled $123.7 million which is 30% higher than $95.1 million in Q2 2017 and a 17% increase from a $105.9 million in Q1 of 2018. One item on Slide 17, I want to highlight involves current income taxes. As you can see despite significantly higher pre-tax income compared to Q2 of 2017, our current income tax expense was lower in this year's second quarter than it was a year ago. The reduction reflects utilization of $16.3 million of deferred tax assets to reduce current income tax expense in Q2 2018. Turning to Slide 18 supported by higher levels, higher levels of revenue and profitability. We generated record cash flow from operations and strong free cash flow in Q2 2018. Cash flow from operating activities -- continuing operations in Q2 2018 totaled $120.9 million, a 56% increase from $77.5 million in Q2 2017 and 35% higher than $89.6 million in Q1 of 2018. Free cash flow from continuing operations in Q2 of 2018 totaling $60.7 million an increase of 18% percent from $51.2 million in Q2 of 2018 and 21% from $50.2 million if Q1 of 2018. Finally, Tony mentioned our strong growth in cash during Q2 2018, with the company ended the quarter with $318.4 million of cash on the balance sheet. Slide 19 highlights the key factors and increasing cash in the current quarter. Our June 30, cash position was $43.1 million or 16% higher than at the beginning of the quarter.. The increase is largely related to the strong cash flow from operating activities, the timing of capital and exploration expenditures as well as the release of $19.8 million of previously restricted cash. The release of restricted cash resulted from changes to security requirements related to rehabilitation performance guarantees. These factors are partially offset by the use of $16.1 million of cash to acquire four million common shares of Novo, 10.4 million to finance this obligations and $3.3 million for dividend payments. As you can see the company entered the second half of 2018 with a very strong balance sheet and remains very well positioned to fund its growth plans going forward. With that, I'll turn the call back to Tony.

[Tony Makuch:]

Okay. Thanks Phil. Over the next few slides, Ian Hall and Pierre Rocque will provide an operational review of the second quarter. And then, we will have our Heads of Exploration, both John Landmark and Doug Cater update you on recent exploration results. So, with that I will turn the call over to Ian Holland, VP of Operations.

[Ian Holland:]

Thanks Tony. Referring to Slide 21, we had a very strong quarter and profitable in Q2, little over -- almost 775,000 ounce is recovered and in fact that was the second highest total in production's history. This is by through an average grade of 20.6 grams per ton mill for the quarter with a grade of 30.4 grams in June really driving a record monthly production for that month, a little bit short of 32,000 ounces. The two images on the right-hand side of the slide or long section and cross section, [indiscernible] this material was mined from over the course of the quarter. As can be seen, there was exceptional grades in stepping in particular on the 4140 and 4200 levels within the Lower Phoenix system. The strong production result drove strong unit cost performance with operating cash cost of 239 and all in sustaining cost of 538 per ounce for the quarter. The other key points to make on this slide is that we've seen a ramp up in key projects of Q2, which is expected to accelerate further in the second half. But we've been latching upgrade, our lower rise is nearing completion and with the rig going to be relocated to surface or the upper hole that's pace fill. Permitting is in progress and [indiscernible] surface delivery holes. Water Treatment Plant constructions in progress and is progressing well. And gradually upper A has been completed with the final commissioning expected to be completed next week. These are important foundation pieces, first of all, as we continue the cost, planned annual production of -- in excess of 400,000 ounces per annum by 2020. With that, I will pass it over to Pierre Rocque.

[Pierre Rocque:]

Thank you, Ian. On the production front, this was a solid quarter for Canadian operation especially at Macassa where we're showing an increase in tonnage, grade and ounces produced when compared to Q1. This is putting us in a good position to achieve our 2018 guidance. If you look at the top right corner of the slide, you will see the location of the stopes mostly in the SMC area that were mined during the quarter. On the cost side, Macassa had a good quarter and first half of the year coming below guidance. We're planning increased capital spending in the second half of the year compared to the first half mainly due to timing of deliveries and the height of the construction season. In addition to the number four shaft project which is progressing as per our schedule. We have started construction of our north sealing storage facility. I will now turn it over to Doug Cater.

[Doug Cater:]

Good afternoon. I'm speaking to Slide 23. On July 5, we realized -- we released exploration drill results from our Macassa mine, on stoke mine complex or SMC exploration drill program. Recent drilling on the 5300 level has identified an area which we have termed high potential, where drilling intercepts are both high grades with grades greater than 30 grams per ton gold and with greater than 3 meters in true width, but then there is eastern extension of the stoke mine complex. The reported intersections are located approximately 560 meters southeast of the location for the number four shaft. With Phase 1 targeted for the completion of early 2022. The SMC continues to expand as drilling intersects strong mineralization to the east. And Taylor, the company has a total of six surface drills actively targeting the up dip and down dip extensions of the Westport free zone and testing for mineralized extensions in the vicinity of the shaft to tube deposits. Our exploration programs are well advanced at this point in time. We think [savings] [ph] results being reported from the SMC at Macassa and successful drilling in Taylor which is expected to expand the mineral resources. I will now hand back to you John.

[John Landmark:]

Thanks Doug. Good day all, and it's a pleasure to give you an update on our Australian exploration activities. Let me dive right into Fosterville, and I'll take you one kilometer underground to view of the Swan infill drilling. So this is on slide 25 and you will detect that. This is a long section view looking to the west of the Swan resource and reserve blocks. To give you a sense of scale, the light gray grid lines that you see here about 250 meters apart. The yellow colored shape with the orange horizontal development is the Swan mineral reserve that's currently reported as 1.16 million ounces as an average grade of 61 grams to ton gold. To the left of this in the lilac color and plunging to the south, it's the Swan mineral resource. Drilling intercepts into the Swan zone and then shown as dots on the slide. The black dots, the holes that we used for the December 27 resource estimate. The red dots are holes that we drilled in quarter one this year. And I drew attention to three intercepts. You can see them documented in the top left-hand corner of the slide. We reported earlier this week, 191 grams per ton gold of two point two meters, 134 grams per ton gold over 11.9 meters and 167 grams per ton over 3.6 meters. And those intercepts are all estimated true width. These holes will all support our resource upgrade from in foot indicate it. Another point to make is that the purple colored dots that you see indicate intercepts that we have actually drilled, but we still processing either in logging, sampling, essaying and in incorporating into the geological models. Moving to the next slide, Slide 26. You'll see that there's now a spread of blue dots on the section. These are holes that we're currently drilling where we will complete by the end of the year. Our objective is to get a large portion of the lilac block. And this is shown here about the red dotted line in the diagram, to the drill spacing of 25 meters by 25 meters. This will give us the confidence to upgrade the mineral resources in this area from in foot indicate it. In turn, when we complete mining engineering design, we have input from the engineers we expect this volume to become part of the Swan design mineral reserves. If you look at the current resource numbers in the top left of the slide, we currently report indicated resources of 171,000 at 116 grams per ton gold and in those resources of 671,000 ounces at 36.6 grams per ton gold. In our view, it's not unreasonable to expect that by the end of 2018, we will have substantially lifted the Fosterville mine mineral reserve which currently stands at 1.7 million ounces and we can also expect to see the overall mine reserve grade lift beyond the current 23 grams per ton gold average. I want to stress that this is only a subset of our overall exploration activity and moving on Slide 27, I can expand further. On this slide, we now zoom out to 9 kilometer long section to view of the Fosterville system. Drilling will commence later this year to the south of Harrier as we've progressed development of the exploration drill drive. And it's worth reminding you that at Harrier we have seen high grade, visible gold in covenant lying material as we mine deeper into the parts of the system. This is very similar to what encountered at Phoenix as we progressed deeper there over the last two years. Similarly, at Robbin's Hill on the on the right-hand side of the diagram some nine kilometers to the north of Harrier, we reported higher grade visible gold intercepts at depth in May this year. We now have another two surface rigs drilled in there. This slide also shows you the traces of drill holes which we will complete at Fosterville by the end of the year with some six rigs both on surface and underground covering this ground. So, in addition, we've got three rigs outside of this view that you see, which is testing positive or look like targets elsewhere on our exploration leases. Turning our attention away from Victoria. I'd like to briefly mention our activities in the Northern Territory. At the Cosmo mine site, we've continued with underground developments and exploration drilling. And have stepped up to having four rigs there. Sixty-five kilometers away at Union Reefs, we have two surface rigs testing the prospects in [indiscernible] both system to depth. And during the second quarter, we put out a news release which drew attention to the positive grade results and depth extensions that were encountered from our drilling there. In summary, we have 15 drill rigs operating in Australia. We are on track to complete over 300 kilometers of drilling this year and that is actually an 80% increase than what we did last year. We anticipate a very significant resource to reserve conversion at Fosterville in the second half of this year. With that, let me hand back to Tony.

[Tony Makuch:]

Okay. Thanks John and also thank Ian, Pierre and Doug for the update. And again to get a sense we have a lot of exciting things happening, a lot of good performance in the company, but a lot of exciting things having going forward. Just to sum up, on Slide number 28, we had a very successful first half of 2018 and this has allowed us to increase our guidance for the year. We reported strong earnings growth, record cash flow and we ended June with a very strong cash position. Our projects are advancing well and we continue to see significant exploration success as both Ian and Doug gave you an update and we continue to grow towards a million ounce of annual production. In finishing, I also on behalf of the people and the management and the Board and the shareholders and myself personally, I would like to thank Phil Yee for his contribution to success of KL Gold. Phil made a big difference and definitely will be missed in the company and this is your last quarterly presentation for KL and again thanks Phil. And with that, we will be happy to take any questions. Thanks. [Operator Instructions] Your first question comes from the line of Steven Butler from GMP Securities. Please go ahead.

[Steven Butler:]

One for you. Can you hear me, okay?

[Tony Makuch:]

We can hear you now, sorry.

[Pierre Rocque:]

Steven, we can't hear you.

[Operator:]

Mr. Butler, please press star one again.

[Steven Butler:]

Can you hear me now?

[Tony Makuch:]

Yes, Steve.

[Steven Butler:]

Sorry about that guys. Congratulations again on a nice quarter. The Q2, Phil a question for you before you leave, on the Q2 deferred tax assets you recognized 16.3 million. Can you maybe give us a sense for what remains in that category and how the cash taxes might begin to flow or not flow, if you can show how much sell through you have on cash taxation going forward here?

[Phil Yee:]

Hi, Steve. If you can refer back to the December year-end financial statements, the deferred tax asset balance was about US$70 million. So we've used about 28.1 million of that so far.

[Steven Butler:]

Okay. And that's really from Australia or is that Canada as well?

[Phil Yee:]

That's Australia.

[Steven Butler:]

That's Australia. Okay.

[Phil Yee:]

Yes.

[Steven Butler:]

Okay. Got it. And good luck in your next endeavor Phil.

[Phil Yee:]

Thank you very much Steve.

[Steven Butler:]

Thank you. Maybe John one for you, question here on cutoff grades and your resource declaration for the indicated and inferred, you remind us again what kind of grades you've assumed for the Swan zone? Thanks.

[Tony Makuch:]

Sorry, Steve. Just in terms -- are you referring specifically to cutoff upgrades or to talk -- you're not talking about -- sorry…

[Steven Butler:]

More in the bottom-end, more in the cutoff grade on the bottom of the chart?

[Tony Makuch:]

We generally use about three grams, but Ian, you want to confirm that?

[Ian Holland:]

Yes. Steve, Ian Holland. From a resource perspective the cutoff grade is three grams. The reserve grade is a little variable depending upon the exact level but 3 to 3.5 grams in that order.

[Steven Butler:]

Okay. So when I did the calculation of the weighted average grade of the 21 holes you released just yesterday, I came up with approximately 39 grams per ton which I think that's accurate. So it sort of corroborates the inferred resource grade thus far. But I was wondering if there is something that you think we might be missing in that calculation or because it's the kind of grade is near three then you think the math was correct?

[Tony Makuch:]

I have to confess Steve, you've probably done more work on it than I have at this stage because that's about it right. Yes.

[Steven Butler:]

Yes. Okay. Okay. And then, Ian, here for Fosterville on the mill throughput. I mean obviously Q2 again was slightly lower than Q1; you're focusing on ounces and making sure that the money is right and going for grade et cetera. So how does that -- how does it look into the third quarter, I know Harrier will start to contribute maybe a little bit more but there's no throughput look to perk up a little bit into Q3 or maybe end of Q4. And how do you think the grade profile will trend Q3 and Q4?

[Ian Holland:]

Yes. Thanks Steve. In terms of throughput we see on current forecast, a relatively small increase into Q3 and Q4 and really is driven by Harrier south coming on line and starting to contribute to a greater degree. Great performance at this point, we see relatively flat line and we do start to see some Swan stopping in the second half, but it's a fairly minor by percentage contributor. And it varies up levels of which aren't the highest grade levels. So from a grade contribution perspective -- we expect Swan to be a bigger impact in 2019 and beyond. So if that answers the question.

[Steve Butler:]

Yes. I think that does. Upper Swan versus 60 grams reserve grade, what are we talking about reserve grade Upper Swan?

[Ian Holland:]

I don't have the stock numbers, but it's a bit less and grades higher as we go lower.

[Steve Butler:]

Yes. Okay. Thanks guys.

[Operator:]

Your next question comes from the line of Dan Rollins from RBC Capital Markets. Please go ahead.

[Dan Rollins:]

Yes. Thanks very much. Back to Fosterville, following up on Steve's question. Just wondering if you might be able to provide a little bit of guidance on how you anticipate getting to that 400,000 ounce per year run rate roughly 2020. Just wondering where the -- is this all grade related or do we start to see the mill throughput start to kick up as we get the benefit of Harrier and you start to build -- get the ventilation and you can start pushing the mill a little bit harder. Just trying to get some idea of how we get to that 400,000 level on a sustainable basis?

[Ian Holland:]

Yes. Thanks Dan. Ian Holland here, I will take that one. It's predominantly grade driven. So there is an increase in Lower Phoenix, fact though, so Swan [indiscernible] as we move deeper into that system. That's the single biggest contributor, but there is also an expected volume increase as we bring more of Harrier set up online as well. And I guess important to note that, the lower most levels of Harrier South of highest grade. In Harrier South could be hit in the reserve. So that had a double impact to that. So, it's a bit of both. But, it's largely the grade impact.

[Dan Rollins:]

Okay. So you're running around 13.50 a day -- tons per day right now in the mill. Where do you see that -- do we get back to 16, 17 or what's the sort of long run rate you're targeting there?

[Ian Holland:]

So closer to that sort of number, Dan. And I guess, that we will point out that doesn't fill the mill, at current capacity, even if that's right, which is more or like 2300 tons per day. So that remains huge opportunity to us.

[Dan Rollins:]

So how you are going to -- if there's some numbers out there, but what's that sort of tons per day you're targeting here longer term?

[Ian Holland:]

So, the 200,000 ounce per annum plus plan with that line was built on something more like 1700 tons as you are outlining.

[Dan Rollins:]

Okay. Perfect. Then how, sustainable right now in the current reserve resources and what you see ahead of you is that 400,000 ounce levels that 1 or 2 years level or do you think you can maintain it for a few years?

[Ian Holland:]

That we based it on the reserve. We can see it for a number of years, if we look at the likely reserve resource conversion that John spoken about, that we may see that extending further. And then, it really is a question of how successful the different programs are going forward. Given that we are focusing on the high grade trends not just in Lower Phoenix but also in Harrier and looking at the potential for high grade in Robbin's Hill.

[Dan Rollins:]

Okay. That's very helpful. And then just on the mining cost at Swan, is it some -- I'm assuming just given the smaller system there -- the mining cost are going to be a little bit higher, is it 10% to 15% higher or is it a little bit more just on the Swan contribution?

[Ian Holland:]

We expected it to be broadly similar. The mining method isn't different. We are introducing pipes. So there is a cost that comes with that. But that is offset by the cost of the current cemented Rock Fill systems. So we would expect to be broadly similar.

[Dan Rollins:]

Okay, perfect. Moving on to Canada and maybe one for you Tony, I've asked this before but you've got under little utilized mill sitting up at Holt's, you've got Holt sort of not much money being put in the ground there just given that royalty, if not haul way that's probably got out is left and potentially more upside if you get the royalty restructured. Where do you stand right now potential negotiations to reduce the burden of that royalty and then open up some potential new value creation for investors?

[Phil Yee:]

Dan, this is Phil. One thing, first off, with that we are doing at Holt Well yes one thing first off with what we're doing at Holt and Taylor, we're pretty much -- we are pretty close to filling that mill. Going forward, we are working definitely we're having good discussions with the royalty holders on in terms of what to do there. And we're working towards building a plan that reestablishes production at the Holt and Holloway to previous levels. And then, if that comes to fruition that will require us to increase the Holt mill to further announce to handle the increased production that's going to come from Taylor. So we think that area is pretty exciting, it's a little bit too early to talk, but we intend to create a lot of value for our shareholders at Holt. And that's working with our royalty holders in terms of -- come as the best alternative.

[Dan Rollins:]

Okay. That's very helpful. Thank you very much.

[Phil Yee:]

Thanks.

[Operator:]

[Operator Instructions] Your next question comes from the line of Kevin Chiew from CIBC. Please go ahead.

[Kevin Chiew:]

Hi. Thanks Tony and team. And maybe just a few questions for me here. First off, in Australia, Ian maybe can you confirm by you getting into the Swan zone in the second half of 2018? And how many stopes have you sort of planned to be mining out of -- at Swan. The reason for my question I know you know, Swan is very high grade and outperforming stope can sway one way or an underperforming stope can sway at the other way. Do you see it as a potential risk in terms of that happening either in Q3 or Q4?

[Ian Holland:]

Hey, thanks. Just in terms of the contribution from Swan, we have exposed it on three levels in development already. We have mined in stops some Swan material that was largely Eagle material, but that was at that juncture. That has had already made, I don't have an exact number for you -- strictly Swan stopes in the second half, but it's only a small number. What we've seen to that, I mean it's fair to say over the last year or two, on average in the structurally complex high grade areas which means some grade overperform, and is there -- so there is some volatility that comes with that, but we are -- it's a growing confidence in our ability to estimate that in particular those numbers grades going forward. So, we think that's reasonably well flagged.

[Kevin Chiew:]

Okay. Maybe switching gears a little bit in terms of Canada here. It's good to see that cash is performing well, a lot of my colleagues and the other guys on the call I have asked about this -- the other operations, but the one I want to talk about is Taylor like in terms of guidance for 2018, considering what has been done since the first half -- in the first half of 2018. Do you see any risk in terms of not getting to the full year number?

[Tony Makuch:]

Go ahead, Pierre.

[Pierre Rocque:]

Hi, Kevin. It's Pierre.

[Kevin Chiew:]

Hi, Pierre.

[Pierre Rocque:]

At this point in time, the numbers that we released for Taylor we are confident in meeting them. There were bump in the roads in the first half and we're planning a substantial increase in throughput with a little bit of help with grade there. We will meet -- we will cover the difference of what we can do in the first half and finished the year within guidance.

[Kevin Chiew:]

Okay. So we should expect a higher grade profile -- well, throughput, is that -- can that go up as well in the second half?

[Pierre Rocque:]

It's mostly going to be throughput.

[Kevin Chiew:]

Oh, throughput.

[Pierre Rocque:]

Yes. Right now we're targeting about a thousand tons per day give or take. At Taylor we're going to increase that in the range of 1200 to 1400 tons per day.

[Kevin Chiew:]

Great. Yes. That's all I have. Congrats again very good Q2.

[Operator:]

Your next question comes from the line of John Tumazos from Very Independent Research. Please go ahead.

[John Tumazos:]

Thank you for the good results $239 cash cost at Fosterville makes it feel like the 1980s. well, less than half our age.

[Tony Makuch:]

Yes.

[John Tumazos:]

For reserve replacement year-end is a good target for Fosterville, 2x, 3x production or do you think it could be better?

[John Landmark:]

John, I think that's a fair range. You've seen what we've got in our resources and we would anticipate pretty well trying to convert most of that. I think what we're seeing, we believe we can convert quite a lot of what we've already got [indiscernible] resources.

[John Tumazos:]

Definitely the grades to supports that -- it could be economics, affirming the geological continuity of it then. That's what turn it well.

[Tony Makuch:]

Thank you.

[Operator:]

Thank you. There are no further questions at the time. We turn the call back over to the presenters.

[Mark Utting:]

Okay. Thanks very much operator and thanks very much again everyone for taking part in today's call. As you've heard there's a lot going on in our company with the solid performance and progress with our growth projects in a very extensive exploration program. So we expect to have a fairly consistent and considerable news flow over the balance of the year. And we look forward to getting an update to the market at the earliest possible time. So thanks again for participating. Have a good day.

[Operator:]

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