Kirkland Lake Gold Ltd.
Q3 2018 Earnings Call Transcript

Published: 31 Oct 2018

[Operator:]

Good morning. My name is Tully, and I will be your conference operator today. At this time, I would like to welcome everyone to the Kirkland Lake Gold Third Quarter 2018 Conference Call and Webcast. All lines have been placed on mute to prevent any background noise. After the prepared remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. I would now like to turn the call over to Mr. Mark Utting, Vice President of Investor of Relations. Please go ahead.

[Mark Utting:]

Thanks very much, operator, and good morning everyone. With me today are most of the members of the Kirkland Lake Gold senior management team, led by Tony Makuch, our President and Chief Executive Officer. We also have our two country heads, Pierre Rocque, and Ian Holland, are with us. For Exploration, Eric Kallio, Senior Vice President, Exploration is with us. John Landmark, our Vice President of Exploration for Australia is also with us. With us today too is Lisa Ross, who is our Director of Finance and she will be providing the financial review today. Out there is several other members of the management team in the room as well. Today, we'll be providing comments as you’ve heard on our third quarter and nine months results for the year 2018. After the presentation, we will open the call to questions. The slide deck that we will be reviewing today is available on the website at www.klgold.com and also through the webcast. I now like to draw your attention to Slide 2 in the slide deck. This is our forward-looking statement slide. During the course of this call, both through the presentation and the question and answer, - may contain forward-looking information about future events and future performance. Please refer to the detailed cautionary language on Slide 2, as well as that is provided in our Q3 2018 press release and MD&A. Also during today’s call, we will be making reference to non-IFRS performance measures. Similarly, a reconciliation of the non-IFRS performance measures is provided in the Q3 press release and MD&A. Finally, please note that all figures today are in US dollars unless specifically otherwise stated. And with that, I'll turn the call over to Tony Makuch.

[Tony Makuch:]

Okay, thanks, Mark and good morning everyone. Thanks for taking the call with us morning. And I think it’s a scary day in most places of the world, but it’s a pretty, pretty exciting time in Kirkland Lake Gold. As always, I will start by thanking the people of Kirkland Lake. We turned in a very strong numbers this quarter during a very low gold price environment in terms of what’s happened and really the results we speak up today both in production costs and production results is a reflection of the lot of hard work and commitment by a lot of people doing a lot of good work. So, thanks everybody. Looking down now at Slide 4, looking at the key numbers. We achieved strong earnings with adjusted net earnings of $60 million or $0.29 per share. Record cash flow from operating activities were $128 million, 77% higher than in Q3 last year. We had record gold production of over a 180,000 ounces and gold sales of 184,000 ounces and our unit costs were very low and industry-leading cash cost of US$351 per ounce, an all-in sustaining cost of $645 per ounce. Looking at Slide 5, we are looking at our production in more detail. Our 180,000 ounces of production in Q3 2018 increased 30% from Q3 2017 and was 9% higher than the previous quarter. Compared to the same period in 2017, we increased production at all four of our operating mines with Fosterville and our Holt Mine both achieving record quarterly production. Turning now to Slide six, the slide focuses on a two largest highest grade gold mine. The Fosterville in Australia and Macassa in Kirkland Lake. Fosterville’s record production of close to 91,000 ounces increased 47% from Q3 2017 and was 17% higher than the previous quarter. We have continued to see strong grade improvements at Fosterville with an average grade of 25.6 grams per ton in Q3 2018. In August, we commissioned a new gravity circuit and saw an immediate spike in grade and jump in gravity recovery. Ian Holland will discuss this more later in the call. Macassa had production of 55,000 ounces in Q3, a 15% increase from the Q3 2017. Q3 production compared to record production of 60,000 ounces last quarter. We continue to get a strong grade performance at Macassa with Q3 grade just over 19 grams per ton. Turning now to unit cost, as shown in Slide 7, we had record low unit cost in Q3 2018. Operating cash cost of $351 per ounce were 27% better than a year ago and a 13% improvement from last quarter. Both Fosterville and Macassa have been better than budget and costs. Fosterville’s cash cost for the quarter were very low at a $189 per ounce. Macassa’s cash cost were $439 per ounce, 16% better than Q3 last year. And I will actually point out I think, the $189 per ounce at Fosterville without any byproduct credits, I don’t know if there is any other mines in the world or very few mines in the world that are achieving those kind of cost metrics. Looking at Slide 8, all-in sustaining cost in Q3 were very strong and ahead of plan averaging $645 per ounce. Again, Fosterville and Macassa were the drivers of our strong performance. Fosterville’s all-in sustaining cost averaged $416 per ounce. I can’t help to think that that is a number I would put in the lowest quartile of industry for cash costs or – sorry for all-in sustaining cost, as well. And all-in sustaining cost actually improved at all three of our Canadian mines as well compared to last year’s third quarter. At Macassa, all-in sustaining cost was $722 per ounce, 14% better than a year ago. We also had improvements of 10% and 6% respectively at both Holt and Taylor year-over-year. The next couple of slides highlight very important components of our Q3 results. I am now on Slide 9. The first relates to revenue and profitability. Lisa Ross will review earnings in more detail in a moment. I’ll focus on revenue. We achieved growth in revenue from both Q3 2017 and last quarter despite reductions of $78 $97 per ounce in the average gold price. These lower gold prices reduced revenue by $14 million and $18 million respectively in each of those quarters. Despite the lower gold price, revenue in Q3 2018 increased 26% from Q3 last year and 4% from last quarter. We achieved revenue growth from both prior periods by having a very strong quarter in terms of business volumes. Basically, we had an excellent quarter of operating performance which drove record production and sales. Slide 10 looks at cash flow in more detail. I’ve already mentioned that we had record cash from operating activities in Q3 of $128 million. I want to focus on free cash. We have long said that KL Gold would be able to internally fund our growth projects. The projects needed to reach million ounces per year while still maintaining a very strong financial position. Q3 2018 provides a very clear demonstration of this capability. We ramped up our CapEx in Q3, particularly at our number four shaft project in Macassa and still generated over $50 million of free cash flow in the company. I can’t say we would do that every quarter as we work through our major projects. But the trend will remain to fund the growth while also building our financial strength. Turning to our 2018 guidance in Slide 11, we are in good shape relative to most of our key targets with one quarter of 2018 remaining. Year-to-date production of 492,000 ounces is ahead of plan and positions us very well relative to the August 1 guidance of over 635,000 ounces. Certainly, year-to-date operating cash cost of $397 and an all-in sustaining cost of $738 are both better than the existing targets for the year. Turning to Slide 12, we review our guidance once a quarter and that is when we are preparing and approving our quarterly financial results. Based on yesterday’s review, based on where we are now even at the end of October, we have announced revisions to guidance in a number of areas. Consolidated production to cash cost and all-in sustaining cost guidance have all been improved. We are now targeting 2018 production of 655,000 to 670,000 ounces with cash cost of 385 to 410 and all-in sustaining cost of $735 to $760. We also announced a number of other changes to guidance as well. Fosterville now expects to produce at least 300,000 ounces at cash cost between $230 and $250 an ounce. We also have improving the cash as cash cost guidance of $450 to $470. We have also raised our growth capital guidance for the year. The higher CapEx really focuses on Macassa and relates to good progress being made with the number four shaft and some new projects we are undertaking at the mine. The number four shaft project by the way is going very well and remains on schedule and on budget. With that, I will call on Lisa Ross, our Director of Finance to provide more detailed financial review.

[Lisa Ross:]

Thank you, Tony, and good morning everyone. Starting on Slide 14, Tony has already mentioned our strong earnings growth in Q3 2018 and our record operating cash flow. I’ll begin with earnings. Net earnings in Q3 2018 totaled $55.9 million or $0.27 per share, a 28% increase from Q3 2017. Q3 2018 net earnings compared to net earnings of $61.5 million in the previous quarter. Higher revenue and improved unit costs were offset by the impact of other income in Q2, versus another loss this quarter. We also had higher explorations pending in Q3 versus Q2. Adjusted net earnings in Q3 2018 totaled $60.6 million or $0.29 per share. The difference between adjusted net earnings and net earnings for the quarter is the exclusion of a $6.4 million mark-to-market pretax loss on fair valuing warrants in our portfolio of strategic investments, mainly our $14 million warrants in Novo Resources. The fair value of warrants is what accounted for the other loss on the income statement in Q3. Turning to Slide 15, we reported record earnings from mine operations in Q3 2018 totaling $115.3 million, an increase of 57% from Q3 last year and 5% from the previous record in Q2 2018. The increase from both prior periods largely reflected revenue growth. As Tony mentioned, revenue growth was driven by record sales, which more than offset the impact of a lower gold price compared to both prior periods. Also contributing to the increase from last quarter were lower production costs. Macassa largely accounted for the reduction reflecting reduced maintenance cost and the increased use of long haul mining methods in Q3 versus Q2. Partially offsetting these factors were higher depletion and depreciation cost and royalty expense compared to both prior periods. The increases reflected higher levels of production and sales volumes. Turning to Slide 16, EBITDA in Q3 of 2018 totaled $119.6 million, a 20% increase from the same period in 2017. Q3 EBITDA was similar to record EBITDA of $123.7 million in the previous quarter. One item on Slide 16 I want to highlight involved current income taxes. As you can see, despite significantly higher pretax income compared to Q3 2017, our current income tax expense was lower in this year’s third quarter than a year ago. The reduction reflects the utilization of $24.6 million of deferred tax assets to reduce current income tax expense in Q3 2018, which was partially offset by a $4.5 million tax recovery. Finally, Slide 17 looks at our cash position which continues to be very strong. Cash at September 30, 2018 totaled $257.2 million, which compared to cash of $298.5 million at June 30, 2018. I will point out that we restated our June 30, cash to reflect the recording of approximately $20 million of cash as restricted cash. As Tony mentioned, we have record cash from operating activities in Q3 of $128.4 million. We also continue to generate strong free cash flow of $52 million. CapEx for the quarter ramped up significantly to $80 million as we made progress with our key growth projects, particularly the Macassa number four shaft. We also had a number of other uses of cash which led to the change from June 30. We invested $48 million to acquire close to 33 million shares of Osisko, a new strategic investment for our company. We also invested $30 million to repurchase close to $1.6 million of our own shares to our NCIB. To sum up, Q3 2018 was a quarter when we continued to generate significant amounts of operating and free cash flow. We also put our cash to use to a number of growth projects and to take advantage of opportunities in the market for future value creation. I’ll now turn the call back over to Tony.

[Tony Makuch:]

Okay, thanks, Lisa. Maybe in the next few slides, we will provide an operational review of the third quarter and year-to-date and then have our heads of exploration update you recent results. But with that, I will turn the call over to Ian Holland, our Vice President, Operations of Australia.

[Ian Holland:]

Thanks, Tony. Looking at the headline numbers, it was an exceptional quarter for the Fosterville with record production of close to 91,000 ounces. This result was really by some strong great performance in starting a development on a number of levels within Lower Phoenix. The long section and cross section to the right on this slide illustrate these high-grade areas with material about 30 grams per ton comprising 27% of tons but 70% of assets mined for the quarter. Particularly noteworthy was the first step on the orebody on the 4140 level, which can add us design and in line with expectations at close to 40 grams per ton. Also important to note was the commissioning of a second gravity circuit. In August, as Tony mentioned previously, this upgrade was on the primary grinding circuit and led to a spotting grade as gold was recovered from the circulating load. Important to note that the component of this gold was cost in nature and would have ended the circuit relatively recently. The increase in production has driven unit cost saving with operating cash cost of $189 for the quarter and all-in sustaining cost of $416 for the quarter. This strong performance year-to-date and the outlook for Q4 has led to an improvement in guidance for that production to 300,000 to 310,000 ounces for the year and providing cash cost to $230 to $250 an ounce for the full year. The final point to make is that a number of key projects continue to ramp up over the quarter. The ventilation upgrade, paste fill project and ore treatment plant are all on track to be completed during 2019 and are important platforms for Fosterville to reach production levels in excess of 400,000 ounces per year by 2020 as we’ve previously stated. With that, I will pass over to Pierre Rocque.

[Pierre Rocque:]

Thanks, Ian. Macassa had a solid quarter processing 3% more tons than during the second quarter. 88% of this tonnage came from SMC zone which equates to roughly 83,000 tons from 22 stopes located between 53 and 57 level and refer to the isometric drawing in the top right corner of this slide. This solid performance translated into unit cash cost of $439 per ounce and helped keep our year-to-date unit cash cost below $450 per ounce sold. With regards to sustaining capital. Most of the year-to-date amount was spent on development and equipment. Projects to continue into the fourth quarter include the number four shaft, installation of the liner in the north tailing storage facility and building the foundations and pump house for the second plant. I will now turn the call over to Eric Kallio for a review of Canadian exploration.

[Eric Kallio:]

Okay, thanks, Pierre and good morning everyone. I’ll be addressing Slide 21. Exploration in Canada was focused on the Macassa and Taylor mine properties and include a 37,000 meters of drilling in Q3 bringing year-to-date meters to about a 100,000 on track for about 135,000 by year end. Drilling at Taylor was mainly on earlier-stage targets geared mostly for the long-term. Efforts at Macassa continues to target the South Mine compass below the 53,000 level. Highlighting some of the new work in Macassa is in as on screen which is a plan of 5300 showing slices through the mineralization and some of the recent drill locations. The projected location of the number four shaft is also highlighted in the top right. As indicated, drilling with the three drills in total of a two working to confirm sand at each part of the SMC complex where we have several wide high-grade intersects near the end of second quarter. The third drill is to the west of these two and on the 5700 level working to extend the SMC and lower D zones to the east and to depth. We did not have any structure leases during the quarter as results are still being compiled. But I can’t say that we continue to be happy with what we see and not seen any obvious limits to the mineralization being drilled at the site. Asides from the bar slide, I would also like to point out that we also completed three new drill platforms with two being on the east and west extremities of 5300 and one on 5700 just east at where we are now. All of these will provide excellent new opportunities for testing and expansion of current zones and looking forward to getting drilled in and starting with this drilling very shortly. And with that, I am going to pass over the call to John Landmark.

[John Landmark:]

Thanks, Eric. Good day all. It’s a pleasure to give you an update on our Australian exploration activities. I think what I will do is I will go straight to Fosterville and talk about the Swan zone infill drilling and after that I’ll move on to tell you about exploration activities elsewhere at Fosterville and finally, I’ll close off by touching on our NT exploration program. So if you look at Slide 22 this is a long section view looking to the west and it shows the Swan mineral resources and reserve blocks. We published this image in the September news release when we provided the market with a progress update on the infill drilling program in the resources block. So the bulk of the pink blind area is targeted for conversion from inferred to indicated mineral resources which we are going to achieve by closing the drill spacing down to that 25 meter by 25 meter centers. So if you have a look at the diagram, the write up labels gives a summary of each hole number and asset grade and grams per ton gold and an estimated true within meters and these are the new holes that haven’t previously been reported. I draw your attention to the far, the yellow boxes which pick out holes with mineralized intersections of greater than 1000 gram meters. These are really spectacular results. For example, 423 grams over 3.2 meters and 353 grams over 3.4 meters is quite exceptional. And hole 2551 which is some 80 meters down plunge of the current resource reserve boundary returned 289 grams over six meters. These are all holes that will support to our resource upgrades from inferred to indicated and seeing results like this gives us confidence in stating that we would convert a significant proportion of 2017 mineral resources to reserves once we’ve closed down the drill spacing and of course, we will release those results at the end of the year. Turning to slide 23, you get a sense of the high density of infill drilling we are currently engaged in the Fosterville on this Swan mineral resource area. Each dot representing a pierce point of the drill hole through the Swan Zone. This is a long section view looking to the west and to give you a sense of scale, it’s 50 meters between each of the grey grid lines. The yellow colored shape with the orange horizontal development is the Swan mineral reserve currently reported at 1.16 million ounces at a grade of 61 grams per ton gold. And to the left of t his in the violet color and plunging to the south is the Swan mineral resource. The black dots are holes that we used for the 2017 resource estimate, red dots are holes we drilled in Q1 this year, purple dots were up to the end of Q3 and then finally the blue dots we've done this quarter before the end of 2018. So that will obviously all be included in the estimate. The area contained within the dotted red line is anticipated to upgrade from inferred to indicated mineral resources and with mining engineering design, we will convert to mineral reserves in our end of year MRMR statement. I want to stress that this is just a subset of our overall exploration activity. And moving on to Slide 24, I can expand further. We now assume up to four kilometer long section view of the Harrier and Phoenix system with Fosterville. This slide also shows you that traces of drill holes highlighted in red, which will complete at Fosterville by the end of the year with six rigs underground. Drilling has commenced this month at the south of Harrier and by December, we will have four rigs drilling from the exploration draw that is being mined as a priority hitting over the last three months. So this a drive we’ve been pushing to the south and it’s on the left-hand side of the drawing. It’s important to note that at Harrier, we have seen high-grade visible golden quartz carbonate drawing material as we mined deeper parts of this system. This is similar to what we encountered at Phoenix as we progressed deeper there over the last two years. Similarly, at Robbin's Hill, some nine kilometers to the north of Harrier and just off this particularly drawing, we reported high-grade visible gold intercepts of depth in mine. We now have another two surface drill rigs drilling there. In addition, we have three surface rigs working hard to test Fosterville look like targets elsewhere on our exploration leases. Now turning our attention away from Victoria and Fosterville, I would like to briefly mention our activities in the northern territory. At the At the Cosmo Mine site, we've continued with underground developments and exploration drilling and have stepped up to having three rigs there where we are drilling both the Cosmo ore system and the Lenten system. And then 65 kilometers of the southeast where we have the processing plant at Union Reefs, we've got two surface rigs testing the prospects and lode systems at depth and the along strike. We plan on shortly putting out a news release updating the market on that drilling results from the program. In summary, we have 15 drill rigs drilling exploration targets in Australia. We are on track to complete almost 300 kilometers of drilling this year and 80% increase from what we did last year. And we anticipate a very significant mineral resource to reserve conversion at Fosterville at the end of the year. Thank you and I will now hand back to Tony.

[Tony Makuch:]

Thanks, John and also Lisa and Pierre and Eric and Mark for supporting this conference call and the presentation. I know that it’s been a somewhat of a trying quarter but we don’t have a CFO for the quarter. But, Lisa and the Finance team, they did a great job of getting the results out and really reflection of the depth of people we have in the company. We are going to be announcing a new CFO whether it will be probably toward the middle or end of November as we progress. We also had Eric Kallio present. We haven’t officially announced Eric – and or externally announced Eric to shareholders, but, Eric is our Senior VP of Exploration working on Canadian operations. Welcome Eric on board. Anyway, I will just sum up now with Slide 25 and we had a very successful first nine months of 2018 and are positioned for a strong finish to the year. We have reported strong earnings growth, record operating cash flow and significant free cash flow. Our projects are advancing and we are poised for significant organic growth over the next two years. We have strong cash position and are using our cash to fund our growth and seek new opportunities and we are rewarding shareholders through share buybacks and dividends and remain committed growing shareholder value. With that, I will say, thank you. Happy Halloweens everybody. Be safe today. Watch out for the trick or treaters and we would be happy to take any questions you have.

[Operator:]

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

[Cosmos Chiu:]

Hi, thanks, Tony and team. Maybe my first question is on the guidance. Certainly, it’s good to see that, so you’ve increased guidance once again. And then that’s positive facing the – I would say, very challenging gold team. But, Tony, if you were to look back on January 1, 2018, or whatever you did the budget for 2018, what are some of the – or one or two of the key positive surprises that you see year-to-date and that’s resulted in your increasing guidance two times now in 2018? Was it grade? Was it throughput? What was it?

[Tony Makuch:]

Well, I think, when we've had the - definitely grade performance, as continued grade performance and improvement at Fosterville has definitely had built up over the years. We’ve had strong performance at some of our other mines. We are really seeing a – really turnaround happening at the Holt mine and up in Canada, it’s a small producing mine, But they are having probably optimal results or some of the best results that mine has ever had since it was maybe originally run by Barrett. So, we got to heads up to the team because anyways, we definitely had some good things happening. And we’ve had some positive results over the year and that’s a reflection of people being able to react, see things are different and changing and being willing to do more than what was just in the budget.

[Cosmos Chiu:]

Yes, and then maybe digging deeper into the Australian assets here, maybe some questions for you. Certainly, it was good to see the first stope coming out of Swan. 40 gram per ton. I can’t believe I am saying this is so high-grade, but it is still lower than the reserve grade that you’ve stated. As you said, it’s on budget. But my question is, when could we start seeing – are we going to start continue to see an increase in the grade? And when could you see the head grade approach to 61.2 gram per ton that you’ve outlined for Swan? And I guess the other part of my question is, how many more stopes with Swan are you going to be mining in Q4 versus Q3?

[Ian Holland:]

Okay, thanks, Cosmos.

[Cosmos Chiu:]

Hi, Ian.

[Ian Holland:]

I’ll guess, just to start with that point, the Swan stope was very much in line with expectation and in fact it was a bit better than the model – underlying model indicated. Important to note that it’s – this is a start of it and it was 6,000 tons at close to 40 grams. Total reserve of more than half a million tons at 61 grams. So, it’s not uniformly – it don’t have a uniform growth and there are stopes which will be lower than that but which will be significantly higher than that. So it really is just starting what we will expect to see is a handful of stopes over the course of Q4 and into early next year as we ramp up. And really, Swan doesn’t reach the full production levels until 2020. In terms of a head grade, very important again for us to note that, the Swan reserve grade is 61, but it’s not the overall reserve grade because this other material as well. So, we will continue to see an increase in head grade. And that really drives the production level to in excess to 400,000 ounces per year by 2020. But it’s not all Swan. So, it’s a proportional increase, but it’s not all Swan.

[Cosmos Chiu:]

Now you are able to tell us what percentage right now is coming from Swan either on tonnage or ounces?

[Ian Holland:]

So, in terms of Q3, it was the single stope and was 6,000 tons out of a total of a 120. So, it’s such a small proportion. But that proportion will grow.

[Cosmos Chiu:]

Of course. And then, at the mill, at Fosterville, certainly good to see that with the gravity circuit there was a spike in the recovery. I believe Q3 recovery was what 97.5%. Could we see – are you putting into the second gravity circuit now? Can we potentially see a further increase in recovery? Or is that what you are happy with 97.5 and you just want to maintain it at that sort of level?

[Ian Holland:]

Well, I think that we reached a bit of a lower diminishing returns on recovery, Cosmos, because, it is fair to say that we can't go beyond the 100%.

[Cosmos Chiu:]

You sure.

[Ian Holland:]

And I guess, and I will note that Fosterville has a gravity component and it’s obviously now a significant gravity recoverable component at the plus 50%. But that remains ore and that drop out ore is double refractory in nature. So that box remains an important part of the picture and there is a – pre-rubbing component to some of the native carbon in the ore as well. So my view is, that 97% plus is an exceptional result. We will always continue to put pressure on the team for more, but there is not much more to give, I think.

[Cosmos Chiu:]

And maybe switching gears a little bit going back to Tony here. Tony, you know, in Q3, you made an investment and strategic investment in Osisko Mining. Previously last year, you have made a strategic investments in Novo Resources. Could you remind us what the strategic investments mean to you? And how you see those two investments sort of play out in the long-term?

[Tony Makuch:]

Okay, so both situations, whether it’s the – with Osisko I mean, and Osisko fits with a lot with what we did with Bonterra and Metanor and really what we are looking at there is, we think there is a potential – a large camp, a new camp performing in the Abitibi in that region in the Urban Barry region in North Western Quebec. And we want to be a part of it. We think there is just potential could be fairly large. Similarly, in Australia with Novo in Pilbara, we see that as being again a paradigm shift or potentially very large gold deposits being discovered in that region in Australia. Both of them you got to recognize are it's a Greenfield exploration projects, still fairly early stage, but lots of potential. And our goal, we are a mining company. We are not into these for investment. We are into these to be able to participate, to provide some oversight if we can. But to keep us on getting insights and understanding what’s happening with these projects as they progress. So, I mean, our goal here is, we have a very strong growth trajectory that we see for 2023, 2024 and we are looking at how do we – where are the next phase of things we are going to be building in Kirkland Lake Gold trying to put the shareholders beyond that period of time.

[Cosmos Chiu:]

Okay. Maybe, one last question if I may. On capital allocation, in Q3, you spent quite a bit of money on share buybacks, on the NCIB. Tony, as you talked about CapEx is ramping up with the shaft four. You also pay a dividend as well. So, in the end, despite the positive free cash flow in Q3, cash actually came down. After CapEx, after dividend, after the share buyback. How do you allocate capital? And do you see yourself being as aggressive in a share buyback in the coming quarters?

[Tony Makuch:]

Well, first off, I mean, the cash is in the bank not to protect management, but we use that cash to provide value for our shareholders as best we can. It’s not our money. It belongs to the company and the corporation and we will want to use that to create value for us and where we see the best way to create value. And in terms of our share buyback, we feel that our shares are even as they are going to be continue to undervalued and we see that is a very important value creator for our shareholders by – when we get the opportunity to buyback our shares. We think everybody should be buying our shares and we will continue to support our share price into the future. The company is very strong financially. We don’t believe and we are going to generate lot of free cash flow over the next few years and we don’t believe that we should just keep money sitting in the bank getting 1% interest. So, we see there is a lot of better things we can do with this cash again to create value. So, that’s a big part of it. But the other part in terms of capital allocation, I mean our main priority we talk about achieving a million ounces a year of production – as we complete the shaft at Macassa, I mean, our goal is to really try to get there a little bit sooner than that and we think we know we are going to be able to give more guidance over the next few months in next year in terms and see progress to that as we go and we are making sure that we allocate our capital as much as possible towards ensuring that we achieve that.

[Cosmos Chiu:]

Great. Thanks, Tony and team and that’s all I have. Thank you.

[Tony Makuch:]

Okay.

[Operator:]

Your next question comes from the line of Michael Siperco from Macquarie. Please go ahead. Your line is open.

[Michael Siperco:]

Yes, hi, thanks very much for taking my question. Just back to the guidance for Fosterville. If my math is right, it implies the 4Q production of 60,000 to 70,000 ounces versus the 91,000 in Q3. Is that just conservatism given the grade variability? Or is there a particular reason that you are expecting a lower number?

[Ian Holland:]

Yes. Thanks, I’ll take that question. I mean, the reality that the year-to-date the quarterly average production is 77,000 ounces. So, it is a – we are projecting something similar in terms of a production output. We do see the potential for a higher result given grade outperformance. But that’s a variable – that’s difficult to draw. So, inherently we’ve – essentially kept a fairly steady heel on that.

[Michael Siperco:]

Is it fair to expect more production from the Swan zone in Q4 versus Q3? Or is that not where we are yet?

[Ian Holland:]

Only a very small amount. So it is really only just starting.

[Michael Siperco:]

Okay. Got it. So, there is nothing specific in the quarter. No shutdowns, nothing else that would necessarily lead you to believe there is lower production. You should don’t want to count on the same kind of grade. Is that fair to say?

[Ian Holland:]

That’s fair to say. Great.

[Michael Siperco:]

Okay. Thank you. A couple more, if you don’t mind, a quick one. Just to clarify on the resource and reserve update at Fosterville, is it your intention not to upgrade to reserves by the end of the – I guess, basically, can you just clarify what the process is forgetting that inferred resource to indicated and then finally into reserves. When should we expect that update to reserves?

[John Landmark:]

Thanks, Michael. John here. Look, obviously we are doing the drilling at the moment. We will probably close off the drilling towards the end of November, early December. We’ve got to led assays come through and effectively, we calculate our resources initially towards the end of the year. But we then have to deplete those given the engineers and that goes through a process obviously of doing the designs and converting into reserves. And then what’s left over is in looked at again and we come up with the residual resource. Basically, that process in itself, that I’ll just describe will take about six weeks and of course in with compilation of numbers, we’d expect to have something to the market in I would say in February next year. But it actually reflects an end of year status.

[Tony Makuch:]

John showed you in the slide he had. You can see there was lot of infill drilling within the inferred resource. So that was infill drilling to increase the drill hole spacing, increase the confidence in the resource. And then once they move to measured indicated then it’s – as John mentioned, it’s an engineering exercise and economic exercise to determine its ore. And so, we do – we will be converting – and upgrading inferred resources to indicated and measured resources and then we will then work – we do the work to comp at a reserve. So, we do expect to announce new reserves and it will come out at the end of February. But effective for December 31.

[John Landmark:]

Yes, it’s worth explaining, Michael, the area that we are focused on, it wasn’t – we weren’t able to qualify that as a reserve last year. The drilling was too broadly spaced. And there were about 800,000 ounces that were in a resource last year and that’s what we are focused on now is upgrading that to a reserve.

[Michael Siperco:]

So, sorry, is it the resource by February or is it the reserve that we should be expecting by February?

[Tony Makuch:]

There is a – we pose still positive sign.

[John Landmark:]

Yes, we come out with the statement at first, but obviously the focus is on what is being converted to a reserve.

[Tony Makuch:]

And just, you know, though we report our reserves – resources exclusive of reserves. So that’s why they have to become a resource first and then forego what’s the reserve and then we report the remainder of the subset of the resource as reserves and the remaining subset of resource as resources exclusive of reserves.

[Michael Siperco:]

Okay, okay. I think that’s clear. Thanks for that. And could you also talk – just going back to Osisko and the Abitibi and your investment in Bonterra. I mean, you talked about it a little bit. Could you talk a little bit more maybe about what in particular you see in that camp? And maybe, what do you need to see in the future to make a decision about further investments or any other involvement you would want to have in the camp?

[Tony Makuch:]

Well, again, it’s a large system that appears to be there. And I mean, again, it’s Greenfield exploration. But we see some – there is a lot of gold showings or gold being identified in various locations. We need to see resources. We need to be able to get a sense on how the resource is growing and/or the confidence in the resource. We think there is still lot of work to do on those areas. And our goal, I mean, we’ve been – in terms of objective of what is a Kirkland Lake asset, first off, it has to be a mine that has significant production. And we think it from a perspective it definitely, it needs to be a large, large, large production similar to what we may beginning currently at Macassa and our Fosterville. And you have to see cash cost to low 650 an ounce and all-in sustaining cost below 950 an ounce over the life of mine, so, as a minimum.

[Michael Siperco:]

And how does grade figure into that? Are you looking specifically for something high-grade or are you more agnostic on that point?

[Tony Makuch:]

Well, again, if we are looking – we are looking more for margin. We definitely – grade is key. And we definitely would look for grade. But sometimes it’s how you look at the orebody and determine where the grade is. Part of it though it could be, high-grade open pit could be – might be different than a high-grade underground and some are higher grade or high margin mines could – it depends on the mining method and the geometry of the orebody. So, there is a lot of differences, so, maybe in a nutshell, I would probably say, if I say 650 an ounce cash cost at 950 all-in sustaining, it gives you a sense at a minimum of what we want to look for. Grade definitely helps that. And if we can get it that a Fosterville levels or the Macassa levels, and that’s really driven by margin as well. But with operating cost, capital cost to develop it, it’s all. The whole thing about building an economic mine there.

[Michael Siperco:]

Okay, great. Thank you. That’s very helpful. I’ll pass it on.

[Tony Makuch:]

Yes. Sorry, I hope that answers it. We don’t just look at – if you know if it’s 20 or 50 grams per ton, but sometimes if it’s 8 grams per ton, but you can mine it at a very cheap cost and get pretty good margins. We are happy to have that.

[Michael Siperco:]

Makes sense. You don’t want to dilute just off too much with that gram per ton material, but I get it.

[Tony Makuch:]

Yes. Yes, but if you can mine gram material for a $189 an ounce, we will take it.

[Michael Siperco:]

For sure. Thank you.

[Operator:]

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

[Mike Parkin:]

Hi guys. Thanks for taking my questions. Kind of a follow-up to that question. What’s your thoughts of the potential that you have seen I think we go do extremely well out there. So are there any areas that you consider favorable from kind of a developing camp standpoint?

[Tony Makuch:]

Sure, I mean, we wouldn’t be against something up and - against something again, you have to weigh size of deposit economics around what you do there. But, yes, we see if we have a potential opportunity there, definitely we’d recognize the success that’s having out there. Lot of that is attributed to the management systems and the processes and the people that they have and recognizing what could be done up in that area. We don’t – it’s in the right jurisdictions. It’s in Canada, yes, cold, it’s winter time, but this is a winter country.

[Mike Parkin:]

All right. That’s it for me. Thanks guys.

[Tony Makuch:]

Okay.

[Operator:]

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

[John Tumazo:]

Thank you very much.

[Tony Makuch:]

We lost.

[Operator:]

You may go ahead with your question. [Operator Instructions]

[Tony Makuch:]

We feel bad here.

[Operator:]

And there are no further questions at this time. I will now turn the call over to Mark Utting for closing comments.

[Mark Utting:]

We’ll catch-up with John after the call I think. Thanks everyone for joining us again today. As you’ve heard, we are a company that’s performing very well. You’ve also heard that we have a lot going on. We are very busy and we’ve got a lot of – we think good things are ahead of us. Just in terms of near-term catalysts, you’ve heard that we have – we are doing a lot of exploration work and we look forward to having some additional news flow for you in the next little while. By the – we then get to the end of the year, and see our financial results and again we expect to have a good fourth quarter and so we can finish the year strong. We will have our 2019 guidance though and we are looking forward to be able to issue that. We think we're setting up for a very good year next year as we move down the road towards that million ounce a year level. And then we had some good dialogue today on the resource update. We had good announcements for us last year and we expect to see a good announcement for us when we get to February 2019. Finally, we are making very good progress with our growth projects, both at Fosterville and Macassa. In fact, we, at Macassa, we had a very good quarter with a number four shaft and we expect to do a lot of work there on in Q4 as you’ve heard. I’d invite you we will be posting photos, the progress we are making. We’ve now got the concrete for our head frame completed and you can see this - that project is coming along extremely well. So, again our website is \www.klgold.com. With that, I thank you again for joining us and have a good Halloween.

[Operator:]

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