Kirkland Lake Gold Ltd.
Q4 2018 Earnings Call Transcript

Published: 22 Feb 2019

[Operator:]

Good morning. My name is Jack, and I will be your conference operator today. At this time, I would like to welcome everyone to the Kirkland Lake Gold Fourth Quarter and Full Year 2018 Conference Call and Webcast. 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. Mark Utting, Vice President of Investor of Relations, you may begin your conference.

[Mark Utting:]

Thank you, operator, and good morning everyone. And welcome to our call to review the results for the fourth quarter and full year 2018. With me today are most of the members of the Kirkland Lake Gold management team. Speaking today will be our President and CEO, Tony Makuch; David Soares, our Vice President and Chief Financial Officer; Ian Holland, our Vice President of Australian Operations; John Landmark, our Vice President of Human Resources, who will be speaking to Australian Exploration today; Duncan King, our Vice President of Mining for Kirkland Lake; and Eric Kallio, our Senior Vice President of Exploration, who’ll be speaking about Canadian Exploration today. Following the remarks, we will then open the call up for questions. Slides accompanying the discussion today are available with the webcast on the website and will be posted in PDF on the website as well. Before getting started, I would like to draw your attention to Slide 2 on the webcast to our forward-looking statements advisory. Our remarks and answers to questions may and will contain forward-looking information about future events on the company's future performance. Please refer to the detailed cautionary note on Slide 2 in this presentation and the forward-looking information set out in our news release dated February 21, 2019 and in the MD&A for our Q4 and full year results for the advisory information. Also during today's call, we will be making references to non-IFRS performance measures. Detailed reconciliations of non-IFRS measures are available in Q4 press release and in our Q4 and full year MD&A. Finally, please note that all figures discussed today are in US dollars, unless otherwise specifically stated. With that, I'd now turn the call over to Tony Makuch.

[Tony Makuch:]

Hey, thanks, Mark. And thanks everyone for being on the line. I'm going to start on Slide 3 on the deck. Before I start, you'll see that we've had a solid year performance in 2018 and we started 2019 extremely strong, and we'll give you some color on things. But it's really a reflection of all the people of Kirkland Lake Gold, from the people that are working on our mines currently, and to our staff, folks in Canada and Australia, to our Board of Directors and our contractors and suppliers that all support the company and fundamentally our shareholders that really support us in terms of doing what we're doing. So thanks everyone for good at hard work in 2018 and the success we've had. And going forward now into 2019, nobody has given up and everybody is actually more motivated this year than we did last year. And we see us having a really strong exciting 2019. Anyway, just going to looking at Slide 3, a couple of highlights, you see we have record production of close to 724,000 ounces in 2018. Very low costs, cash costs of $362 an ounce, probably industry leading and definitely a very few companies can match that. All-in sustaining costs $685 an ounce. We responsibly invest in our mines and in our business to sustain it and grow it. We've had industry leading earnings and cash flow, $1 a share in earnings for the year. Free cash flow of $250 million, we performed extremely well against our guidance and we've also increased our guidance already this year and really fundamentally supported by strong growth in reserves that supports our focus or one of our core competencies in terms of exploration. Turning to Slide 4 on the deck, you’ll see looking at some of the parts of our operating performance in more detail. You’ll see production growth was up 21%. But in terms of that, the true value creation here in terms of growing production was cash cost improved 25%, all-in sustaining costs improved 16% year-over-year. And fundamentally we don't show it on the slide here, but margins improved substantially as well. Going to Slide 5, just David will speak more to earnings later in the presentation. But I think some highlights, what I really want to point out in terms of the 2018; operating cash flow was up almost 75%, over $0.5 billion in the year. Free cash flow was up 40% year-over-year and that resulted in a quarter-billion of free cash flow in 2018. Just going to Slide 6, this shows how we performed against our guidance. You can see we beat our production in unit costs guidance handily. And that was based on improved guidance in 2018, so we did update guidance and then we still beat it on production and unit costs and we performed well against all our key indicators for the year. Just slide -- next slide here, just looking at just some highlights from Q4. We had record -- it was a record quarter for the company, production was over 230,000 ounces, really bodes well to support our guidance for 2019 now. We had record results of both Fosterville and Macassa from a production point of view. The great for the company in the quarter was 17.8 grams per tonne or highest the level ever. We had cash costs of $286 an ounce, all-in sustaining costs of $567 an ounce and result of the cost -- increased production cash cost was stronger earnings of $0.52 a share on adjusted basis and we generated $86 million of free cash flow. Turning to Slide number 8, this really shows the growth in our cash position really supporting the financial strength of the company. You see we increased our cash year-over-year by almost $100 million and this was done at the same time that we ramped up our growth capital expenditure both in development of the new #4 shaft at Macassa as well as increased efforts in investments both at Fosterville and in exploration both in Canada and Australia. We also made some strategic investments in the year. We brought back our own stock, and we increased our dividend. Yesterday, we made a major announcement we are increasing our guidance for 2019 and we now expect that we potentially can reach 1 million ounces as earlier as this year, have given guidance for the next three years showing solid production for the next three years. This is driven largely by the higher reserve grades at Fosterville, but we also announced resumptions of operations at Holloway Mine. We expect to do 20,000 ounces this year, grow to at least over 50,000 ounces a year by 2021. Slide number 10, just gives a little bit more detail on our guidance for 2019 and you see the improved guidance posted on production. We have also lower unit costs both at posting cash costs and all-in sustaining costs. But this is -- we talk about growth and I guess if you try to quantify, this is perfect growth, it’s more units at lower cost and it’s even at -- you take a one step further, we are price takers in this industry but we’re producing more gold at lower costs and the price of gold is going up too, and we think we’re in a really strong gold environment. So there’ll be lots of excitement, and lots of value creation in Kirkland Lake in 2019. And just turning to Slide 11, you see the key to improved guidance was really the growth in reserves at Fosterville. We had a 60% growth year-over-year to 2.7 million ounces and the grade increased 34% to 31 grams per tonne, supporting by that or really a big part of this is the Swan reserve doubled to 2.3 million ounces at 50 grams per tonne. It’s got to be one of the -- definitely world-class gold deposit, just emerging at Fosterville in the Swan Zone. We also had growth in reserves at Macassa, 11% growth and we know the grade improved as well. The Slide number 12 just shows our reserves on a consolidated basis and you see year-over-year we had a 24% growth in reserves net of depletion of 750,000 ounces mined in the year. So with that, I’ll turn the call over to David. Thanks.

[David Soares:]

Thank you, Tony. I’ll just take everyone through some of the key financial performance indicators both for full year and the quarter. Starting with net earnings, we see -- we saw very strong growth for the year over 2017, 107% increase from the prior year from $132.4 million to $273.9 million. Really it was all of strong revenue growth, improved unit costs and lower depletion and depreciation. All this while increasing our exploration expense by $18.2 million and that reflects the company’s commitment to organic growth. On an adjusted basis, net earnings grew 93% year-over-year from a $149 million to $287 million. Looking at revenue for the full year, we saw a 23% increase from $747.5 million to $915.9 million and this is really over a period where gold price was relatively flat and this performance is driven mainly by the performance of sales increases at both the Fosterville and Macassa mines primarily. So moving on to the next slide, looking at our earnings from mining operations. We saw a year-over-year increase of 69%, obviously driven by increases in revenue as previously discussed and lower production costs. Those lower production costs were impacted by the company's decision to put the Northern Territory operations on care and maintenance halfway through 2017, for depletion and depreciation costs, mainly driven by the increases in reserves that Fosterville from -- at the end of 2016, roughly around 500,000 to 1.7 million at the end of 2017, or at the beginning of 2017 rather. Moving onto EBITDA for the full year. We saw a 49% increase year-over-year from 356.9 million to 531.6 million, a 49% increase which was mainly driven by the increase in net earnings, decreases in depletion and depreciation. Looking at -- now moving on to the fourth quarter and looking at net earnings for the fourth quarter, we saw significant growth both compared to the fourth quarter in 2017 and also compared to the third quarter of 2018, 160% increase versus the fourth quarter of 2017 and 91% increase versus the third quarter of 2018. Again, underpinned by -- and driven by strong revenue growth, improved unit costs and lower depletion in Q4. Also compared to 2017, impacted by the loss from discontinued operations related to the Stawell. In terms of adjusted net earnings, we see similar growth both year-over-year and against the prior quarter, 73% growth over the prior year fourth quarter and 81% versus the third quarter in 2018. Adjusted net earnings ending the quarter at $109.6 million. Revenue for the fourth quarter, again showed very strong growth against prior year and against the previous quarter, 32% increase over the prior year fourth quarter, 26% increase over the previous quarter in 2018 Q3, closing at $280.3 million, mainly driven by volume impact, $76.7 million impact from volume total sales. Moving on to earnings from mining operations for the quarter. A large increase from the prior year fourth quarter, 85% from 92 million to 170.1 million and nearly 50% increase against the prior quarter from 115 million to 170 million. EBITDA for the fourth quarter, again, strong increases, nearly 100% increase over the fourth quarter in 2017 and 57% over the third quarter of 2018, posting at 187.6 million driven by strong net earnings or increase in net earnings over the same periods, and again impacted by depletion and depreciation for the reasons mentioned earlier. Tony talked a little bit about our strong cash position. If you look at the final slide in my deck, we can see the waterfall that breaks out the changes in cash in 2018, starting the year at 231 million, a net addition from cash from operations of 543 million. We invested in our projects, our core projects at Fasterville, Macassa and other areas of the company, $293 million of investment in the company. The investment in public entities that totaled 66.1 million, the buyback of shares 30.8 million, dividend of 16.3 million during the year that were paid, lease payment of 23 million and then the foreign exchange impact of 21.7 million and other cash of 9.6 million. For a total ending cash balance of 332.2 million. So with that, I will turn the call over to Ian Holland, VP of Australian Operations.

[Ian Holland:]

Thanks, David. So starting with Slide 22, I wanted to give a brief overview of the continued improvements in production at Fosterville. Q4 saw a record of 124,000 ounces produced, driven by improvement in the new grade of almost 40 grams a ton for the quarter. The key contributor to this result was the mining of four stopes from the Swan ore body, which was an acceleration from the previous plan due to refinements in the mine design and strong development performance. The stopes also performed strongly from a grade reconciliation perspective relative to expected grade. Looking at the image on the slide, we have highlighted the four stopes that were mined over three different levels for the quarter. This result kept of an outstanding 2018 for Fosterville, with a record 356,000 ounces produced for the full year. The improvements in production have translated through to exceptional and improved margins with Q4 cash costs of a $189 per ounce and all-in sustaining costs of $416 per ounce. And full year results for the same metrics of $200 and $442 per ounce. Turning to the next slide, a clear takeaway for Fosterville is that the best is yet to come. We announced a very significant upgrade to the reserve base yesterday, with the new total of 2.7 million ounces of 31 grams per tonne. The main driver behind this increase was the doubling of the Swan reserve from the previous 1.16 million ounces to 2.34 million ounces as a result of the highly successful exploration and definition drilling programs over the course of 2018. Moving to the revised three year guidance, we can see the impact of both the increased grade and continued refinements to the mine design and schedule. This second factor is particularly important in allowing for additional high grade Swan production to be brought forward into the 2019 and 2020 periods. The net result is significant increases to 2019 and 2020 to 550,000 to 610,000 ounces for each of the first two years with 2021 remaining in line with the previous guidance at 570,000 to 610,000 ounces. The mining sequence itself is illustrated on the visual on the slide. The view is an isometric looking north showing Swan and Eagle with the sequence progressing from the high grade center at and top down. In terms of volume, we are projecting throughput rates in 2019 similar to 2018 at in the order of 1,300 tonnes per day, with an increasing to in the order of 700, 800 tonnes per day in 2020 and 2021 as volume increases from both Lower Phoenix and Harrier South. With that, I'll now pass over to John Landmark, who will provide an update on Australian exploration.

[John Landmark:]

Thanks Ian and good day everyone. I'll take you straight to Fosterville on Slide 24 and first I will talk about the Swan Zone infill drilling. Then I'll move on to tell you a little bit about exploration activities elsewhere at Fosterville. Finally I'll close up by touching on our Northern Territory Exploration Program. The slide you're looking at here is a long section looking west of the Phoenix system basically in the center of the slide and Harrier just to the south on the left. And if you look to the right of the image, you're seeing 4 kilometers to the north is the Robbin's Hill mineralized system. So the field of view for this image is about 9 kilometers in strike length, effectively 9 kilometers of mineralized strike extent. And if you look at the yellow dot just to the -- slightly to the left and down that's where Swan is. It's a small yellow shape, it’s a deeper part of the Phoenix system. If we zoom in on that on Slide 25, if we go back to looking at an isometric view, which shows the recently released 2018 mineral reserve blocks, so the green shapes are mined isotopes and the red is what we’ve now declared as the -- that’s part of what we’ve declared this year as the mineral reserve blocks. And in particular, the bulk of that is obviously taken up with the Swan Zone. The dramatic increase in the Swan mineral reserve is a direct outcome of last year's infill drilling program, which we talked about on several of our quarterly calls. And the aim of that was to close down the drill spacing to about 25 meter by 25 meter centers. In all, there were about a 130 drill holes totaling over 40,000 meters of drilling with 25,000 assays, which provided us with the information needed to convert from inferred to indicated mineral resources. With this additional information, we were able to list the top cuts of selected domains in the Swan and Eagle zones and we looked at those from around about 800 grams per tonne to 3,000 grams per tonne. This has contributed to raising the average grade of the new material coming into mineral resource -- into the mineral reserve from what we had in 2017. Also just statistical work indicates that Swan has a relatively low coefficient variation and is surprisingly low for such a high grade deposit and it gives us greater confidence in the lateral continuity of the high grades. Moving on Slide 26. This is a schematic cross-section comparison between Phoenix and Harrier. If we think about -- and look on the left hand side initially, at the Phoenix cross-section, as we progressively mined down plunge on the Phoenix ore zones, we saw a shift around about 800 meters below the surface from the bulk of gold mineralization being in the syncline setting to switching across into the anticline hinge. As we progressed down below this level in terms of higher grades and more frequently noted visible gold in the exploration drilling and in due course the Swan and Eagle Zones emerged accredited. Now by comparison if we look at Harrier, in the Harrier system, we really have only been confined to the right hand side to the syncline area. And as we have come down in this syncline setting, we have started to identify higher grades and visible gold. Drilling to the west of this and down deep, we have also identified the anticline setting with some signs of gold mineralization and this has become our priority target. We don’t believe Swan is one-off occurrence and we are very excited to be testing this target. Currently four underground drills are exploring bulk of the base of the Harrier syncline zone and the projected anticline position. And we’ll certainly give you updates on this as this progresses during the first half of this year. This model has significant implications for value adding other targets such as Robbin’s Hill, which is 4 kilometers north of Fosterville mine and also a number of regional targets being progressed in our high quality target pipeline. I should also stress that our current mine leases which are about 17 square kilometers represent less than 1% of our total exploration land package around Fosterville gold mine. In finishing up, I want to mention that our Northern Territory exploration is progressing well, so moving to slide 27. We’ve got four underground drill rigs at Cosmo, Lantern, expanding and upgrading our 2016 discovery. In addition, we’ve developed three cross cuts at different levels within the Lantern ore body and turned out several drifts to obtain bulk mineralized samples. The development has given us a far better 3D understanding of the higher grade distribution controlled by second restructured -- structural features. Lantern mineral resources on an inclusive basis had some 600,000 ounces of gold with an average grade of 4 grams. And if you look at the mineral reserve, which is 60,000 ounces, grading around 5.3 grams per tonne gold. This is a significant increased on what Cosmo previously was graded at. At Union Reefs, we now have four surface rigs testing the vertical and laterally extensive Prospect and Lady Alice streams and drilling continues to show the depth potential of these loads adjacent to the Union Reefs Mill. And a final note is that we’ve recently being granted government approval to start drilling at Pine Creek, which is 10 kilometers to the south of the Union Reefs plant. We will again be testing the deeper down deep extensions of several previously mined open cuts including under the Enterprise pit, when mining in the 80s and early 90s produced around 1 million ounces from a vertical quartz gold shear system. So in summary, exploration in Australia in 2018 has been very successful. Going forward, we currently have an outstanding portfolio of advanced targets to aggressively chase, with over a $100 million being spent on exploration this year and some 300 kilometers of drilling planned. We continue to review our progress with a potential to even increase the exploration efforts further. And with that, I’ll finish on the exploration and let me hand over to Duncan King, who will give you an update on the Canadian operations.

[Duncan King:]

Thanks, John. Macassa had record production in 2018 of 240,000 ounces, an increase of 23%. Cash cost for the year of $426 per ounce with an all-in sustaining cost of $713. Turning to Q4 2018, we had record quarterly production of 71,000 ounces. Cash costs were $370 by far the lowest ever for the mine. Also are all-in sustaining costs were also very low at $650 per ounce. A feature of our strong performance in Q4 was great outperformance in the SMC around the 5700 level. We had a number of spells that were expected to be high grade, and they did even better than planned. Turning to Slide 29. It shows our three-year mine plan and our three-year production guidance. We will be continuing to mine around the 5700 level and continuing to drive deeper over this period. We will also continue to develop our 5300 level exploration drift until late this year. We will also be developing out to the location at the #4 shaft to be ready for Phase 1 completion in early 2022. In terms of production growth, the big step up in production starts in 2022 as we ramp up to 400,000 ounces a year. I'll turn the call over to Eric Kallio for exploration.

[Eric Kallio:]

Thanks Duncan and good morning. My first slide today is number 30, which is a 3D view across the Macassa and highlighting the SMC and new information, resources and exploration. As indicated exploration in Q4 was strongly focused on the SMC below the 5300 level and included approximately 260 meters of development and 15,000 meters of drilling. New development was that the east and west limits of the level mainly for new drill platforms and the drilling focused on the east portion of the SMC to test for extensions both to the east and to depth. I mentioned in the past, we continue to see steady progress here with extending the zones both east directions, although in some cases not as fast as we’d like due to distances and angles for drilling. And this is something that we're looking at improving as we go forward. In terms of resources, the new total announced was 982,000 ounces of 17 grams per tonne in the inferred category and 330,000 ounces 16.5 grams per tonne in the inferred, which a is decrease from 2017 and due to several factors coming together all at the same time, including conversion of over 460,000 ounces to reserves, removal of certain historic zones and reinterpretations due to new drilling. Despite the above, we still feel very strongly about the potential at the mine and already take some actions to try and reverse the courses as soon as possible, putting the 50% increase to our drill budget for 2019 from 2018 and accelerating work in the west side of the SMC, where we still see some very large gaps in our testing. Turning to my next slide, which is number 31. We see a planned view of the Kirkland North property highlighting some of the other work we're doing to advance resources. As indicated, this is a very large land package overlying some very good geology, in our view still was with very limited exploration and a lot of potential. In terms of our recent work here, it’s been limited in size and focused almost entirely on the Taylor. And although we've had success, we're taking a little bit of a change in quartz in 2019 and increasing our budget by about 35%, to about 85,000 meters and commencing work on a number of other properties, including Nighthawk, Golden Highway and the Holt-Holloway area. At this point some of the details are still being revised but drilling has started and we look forward to providing some very positive updates on this work throughout the year. With that, I'll pass the call back to Tony.

[Tony Makuch:]

Okay. Thanks, everyone. Lots of good things and trying to give everybody an outlook to what's happened in 2018 and I’m getting now to Slide 32, I mean we can -- I guess we got to put 2018 behind this now and let's see what are we doing going forward and coming into 2019 you see we've already started the year very strong and we've revised our guidance and we're on track for in 1 million ounces of production and at that low cost of production as well. So, lowering costs means we're going to improve our earnings so we're going to see -- continue to see growth in earnings and industry leading earnings, since we got at point. And we're going to generate strong free cash flow and accompany well-financed solid balance sheet. We're focused on continuing to achieve growth in operations, growth in reserves, we continue to explore and we're probably going to be increasing our exploration efforts throughout 2019 and looking for a lot of growth there, a lot of new value creation for shareholders. And fundamentally last part here in the last medal we show here is superior shareholder returns. That's really what it's all about. Let's go to slide number -- the last Slide number 33. And this clearly shows our share price performance. And we had solid share price performance. And some people might think, okay, well, where is it going to stop? Well, we give our three year guidance out, we try to give you a reflection, we don't include in that what we're doing in Northern Territory as John talked about, we mentioned about just starting up at Holloway and maybe growing production but it's just a beginning of getting really the Holt and Holloway complex back in production and see what we can do there, maybe we can bring it back to the levels that it was at during the days when Barrick and Newmont both owned these assets. We see some potential and pretty exciting growth there. We know we haven't filled the mill at Fosterville and there's more to come at Fosterville. We don't have the benefit of the shaft in at Macassa and the growth for Macassa beyond 2021 that's not shown in our guidance and we're drilling. We're spending a lot of money in exploration, where it could be a drilled hole away from the new discovery. John mentioned about the exciting things we’re doing at Harrier, a lots of other parts in the Fosterville region. We think that is one of the -- still the best is still yet to come there and really looking back at new efforts in terms of exploring around Kirkland Lake and maybe we'll try to find them, not only we’ll try to find the next one zone at Fosterville but we're going to try to find the next SMC zone in Kirkland Lake. So a lot of excitement, there’s still lots to do, a lot of traction in terms of where the story is going to go and one thing we didn't also talk about and lead into -- maybe in the next quarters performances, we’re generating a lot of free cash, we have a lot of cash on the balance sheet. The company belongs to the shareholders. We're going to find ways to ensure that the shareholders continue to see or see more benefit from the value creation from this company. And so keep watching. There's lots of exciting things happening at Kirkland Lake and there’s still lots of share price performances going to be driven. Thanks for listening, and we'll be happy to take any questions.

[Operator:]

[Operator instructions]. Your first question comes from line of Jake Sekelsky from Roth Capital with Roth Capital Partners. Your line is open.

[Jake Sekelsky:]

Good morning guys. Congrats on the quarter, and thanks for hosting the call. It looks like you're budgeting $100 million to a $120 million for exploration this year, with the majority targeted for Australia. Can you just give us a breakdown between Fosterville and Northern Territory?

[Tony Makuch:]

Go ahead, Ian.

[Ian Holland:]

Yes, sure. Yes, thanks for the question. The -- it's reasonably evenly split, it’s largely skewed towards Fosterville, but there is going to be investment going into the Northern Territory as well. Just for context, there’s currently 21 rigs active, so 13 rigs at Fosterville. The majority of which are focused on exploration and 8 rigs in the Northern Territory. So we are continuing to aggressively explore in Northern Territory, with really that view to bringing back a production center focused on multiple mining zones, feeding a central mill.

[Tony Makuch:]

And one thing we said also allude to, I’ll give it a little bit of a heads up on and maybe you'll see it in the next quarter was we are also looking at potentially increasing our level of exploration and development efforts in the Fosterville area.

[Jake Sekelsky:]

And then just to dovetail off of that a bit. Can you just maybe provide a bit more color on what you're looking to see out of the Northern Territory in order to get through a research decision there? I'm just trying to get a handle on what you're building to see to step-up exploration efforts there and maybe potentially get to a production decision?

[Ian Holland:]

I guess there's two criteria for us really, one that we want to see an operation of significant scale. And for us, we're looking at a minimum 100,000 ounce per annum production profile. But we also want to see attractive cost metrics. So cash costs of US$650 or lower all-in sustaining costs of US$950 or lower. We don't expect it to be immediately at those sort of numbers, but we want to see it three-year pipeline to that. The most likely scenario is that we would see a staged production increase. So we would be starting with Cosmo and Lantern given it’s small developed spike, moving to Union Reefs and then with success moving to Pine Creek as well. So I think there is significant scale opportunity here and there is a lot of work to do in terms of defining that and defining our plan, but there's a lot of excitement about that as well.

[Operator:]

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

[Cosmos Chiu:]

Thanks Tony and team for hosting the call. And congrats on a very good 2018. My first question is on Fosterville here. And you increased 2019 production guidance yesterday. I just want to get a bit -- hopefully a bit more granularity in terms of what's happening here. Is the production increase due to throughput, due to grade or is it a combination of both?

[Ian Holland:]

It's essentially grade driven, Cosmos really. As I touched on in the presentation, expected throughput is pretty similar in 2019 to 2018, but what we've been able to do, obviously the reserve grade increased from our recent reserve update. But also really importantly, we have been able to make some refinements to the sequence that allowed us to dropdown an extra level in Swan. So we've been able to effectively bring forward some production and because of the sequence where we mined from the high grade center at and top down that means we've been able to bring forward high grade production as well. So, in terms of a rough proportion, Swan will comprise in the order of half of the terms mine and process in 2019, which is about the proportion that is in the total reserve base as well. So it's roughly in line to that.

[Cosmos Chiu:]

And maybe a follow up on that. Ian I'm glad you brought up grade. When the reserve came up with Swan yesterday it's still high, very, very high grade but it did come down from the last sort of estimate on the Swan reserve. During the Analyst Day you talked about increasing the top cut and today is what you talked about increasing the top cut versus certain zones at Swan which I would have taken and thought as a potential for the overall reserve to go up, the reserve grade to go up. Are there any other assumptions, dilution assumptions that you might have changed that might have caused the Swan grade to come down?

[Ian Holland:]

So really what it reflects Cosmos that the inferred resource that we converted was a bit lower grade than the previous reserve. So if you recall, it was at 36 grams. So the effect of the modeling changes that we've made, the list in the top cut did lift the previous reserve grade and did lift the grade in the inferred resource but in sum the total of those and the average grade has come down a little bit. I'm going to say that we're pretty excited about doubling the ounces at 50 grams, we're not unhappy with the result.

[Cosmos Chiu:]

Yes, for sure. And then if you can kind of help me visualize, there were some of these inferred grade, some of these potentially what used to be or what are lower grade inferreds, what's the location here and how does that -- how is that structurally controlled compared to your higher grade zones?

[Ian Holland:]

So, we don’t supply lower grade, to be fair. But potentially the direct down plunge extend to the south. One of the remarkable things about Swan is its continuity, structural and geological sense. It’s a defined -- very clear defined structure. And it really allows the high confidence in terms of the placement of development and design. So from that perspective it’s continuity is excellent. And to answer your question it’s the direct down plunge extension.

[Cosmos Chiu:]

Okay, and then maybe one more question on Fosterville here. I think in last quarter you talked about the need to upgrade the gold room to accommodate the increase in production, are you -- have you done that or is that -- is there enough capacity right now, even with increased 2019 production guidance?

[Ian Holland:]

Yes, good question. So, there is enough capacity, although we are upgrading to make sure that that’s -- those are the case. What’s really benefited us there is that the proportion of recoverable gold has increased. So we recovered approximately 75% of the gold ore in Q4 from gravity and into this year we're seeing similar sort of proportion, so that's really enabled us to be able to process what we have without refinery upgrade as yet but that's in progress for 2019 and will be completed before the end of the year.

[Cosmos Chiu:]

Okay. Maybe switching gears a little bit of a quick question for David here. Certainly you're making a lot of cash and 2019 projected cash. I think you had mentioned taxes during the Analyst Day as well but could you help us in terms of like what kind of cash taxes, overall taxes but more importantly cash taxes should we be modeling for 2019?

[David Soares:]

Look I think the effective rate is -- we reported the effective rate in our investor presentations in January. For 2017 at 19.8% and that was really -- and that was in 2017 that was really driven by the application of loss carry forwards against income from Fosterville that has really kind of drilled back down. I think going forward you'll see the effective tax rate on consolidated basis to be more in line with the statutory rates. If you look at the -- like at the end of 2017 about 70 million of the deferred tax assets that we had related to Fosterville. And by the end of this year, we used up probably about 55.4 million of that. So some carry forward into 2019, but we'll use up -- we will use that up in the first quarter. That was about 12.9 million. And so going forward, I would expect the tax rates to really near the statutory rate.

[Cosmos Chiu:]

The cash tax rate you mean right, David?

[David Soares:]

Yes.

[Cosmos Chiu:]

Okay. And maybe one last question, maybe back to Tony here, just a quick one here. Restarting Holloway now and you've talked about restarting the Northern Territory stuff Cosmo and Union Reefs. Certainly in the past year -- past two years or three years, the key driver of the share price of the company has been some of the bigger ones Fosterville, Macassa. So overall, I'm just trying to -- I'm just wondering how these some of these smaller operations fit in to Tony your overall strategy. And are you looking for a particular rate of return? I think Ian had mentioned scale, like I'm just trying to wrap my head around in terms of how some of these operations could evolve and how they fit into the overall strategy?

[Tony Makuch:]

Well, I mean first and foremost I mean these other operations are part of the business of Kirkland Lake Gold. There's value there and it's important for us to make sure that shareholders extract value from these assets. And that's what we've been exploring and working on things to move them forward. We have indicated that we -- really when you when you look at it, that we -- from a production basis as Ian talked about the proper scale, 100,000 ounces a year plus and at the proper cost metrics. And if you look at those cost metrics and you say, if I use $1,100 dollar, you can get a sense of we're really trying to get a minimum 15% rate of return on our assets. And that's what we're looking forward to do with those projects. We got to build them up to a proper level and we want to make sure the costs are there and get value, because they're valued for the shareholders and we want to make sure that they don't distract us from the value creation, we do in other places. And we're always cautious of that. But we see some upside in terms of what's here. Northern Territory, a significant area, been very, very much unexplored. Similarly now the whole Holloway area has been very much unexplored over the last 20 years, has been a lot of financial and economic circumstances. And for me to sit there and tell my shareholders that we have -- although, we found a new discovery at Macassa, new discovery at the south of the complex founded at Macassa after 60 years of mining and the new discovery at Fosterville in terms of the Swan and Eagle the Lower Phoenix results. Just because we found it there, we don't think, we can find anything anywhere else, it would be silly. We have to explore these and look at what's there and look at what we can do to build them into proper business units. And our view is we see some potential on both of these assets and that's what we're going to invest money and looking at that. So is that good answer?

[Cosmos Chiu:]

It was great. Thanks, Tony. And that's all I have. Thanks a lot once again.

[Operator:]

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

[Dan Rollins:]

Yes thanks very much. Ian don’t want to dive too deep into the Fosterville guidance increase but just with outside of the Swan Zone, if you looked at the grades you're pulling from the Lower Phoenix and Eagle Zones were quite high last year and the current reserve grade I think is if you pulled out Swan is roughly about 9.5 gram a tonne, is that something you guys are currently assuming in your models for the ex-Swan material, is it closer to reserve. Are you still running 50% to 100% above reserve grade on that material in the next few years?

[Ian Holland:]

Thanks Dan. We are assuming reserve grades in that plan. It's fair to say that the average grade at Harrier South is lower as we understand it now. But the other material in Lower Phoenix ex out of Swan is higher than that. But we are assuming reserve grades.

[Dan Rollins:]

Okay, so Lower Harrier, you now assume that they're actually lower grade. Is that based on the drilling that you saw late last year? Or are you still hopeful that you see that pick up in free gold and visible gold and more quartz here as you did in Lower Phoenix?

[Ian Holland:]

Yes, I should clarify, the highest grades in Harrier South on the lowest levels, and that is only limited by drilling promotion to the south. So we have seen that trend and we're optimistic about that down continued trend with the drilling programs that John spoke about.

[Dan Rollins:]

It’s a bit of a Holloway probably for you, but just given the grades, it doesn't take much change on a throughput level to impact production and free cash flow, I guess we're just not used to seeing actually profitable mines at this level, at least in that since 1940s. But you mentioned in Q4 you had a limitation on refining capacity at Fosterville and until the new gold room you're going to be limited. Could you give us some clarity on what we should expect production wise from Fosterville in Q1 and Q2 on a versus the whole year guidance, is it 15%, 20% in Q1, a little bit higher in Q2 and then full bore in Q3, Q4. Just risk is that the market gets ahead of expectations and you sort of slip, stock is hit. But it would be interesting if you could give a little bit of color on that to control the messaging here today?

[Ian Holland:]

Yes, for sure. So, I want to be really clear, we don't have any processing constraints at current rates. So in Q4 we milled everything that we could that we mine and the reason we didn't have any processing constraints at the back end was that we had a significant increase in the gravity recoverable component. So the 75% for the quarter. Given that we will continue to see those sort of proportions, which we have so far in 2019, we don't see any capacity constraints. So it really is driven by the mining schedule. Now, in terms of how that looks over the course of the year, I don't want to give precise numbers. But I guess sufficed to say that we would expect to see in the first couple of quarters numbers more similar to Q4, then increases in the second half. But we wouldn't necessarily expect it to be purely linear either. So -- but in a broad sense, that's the sort of makeup.

[Dan Rollins:]

That is very helpful. Just moving onto Swan, obviously, you drilled off everything you had in resources at the end of '17 into reserves and actually added more. What's your level of confidence that you can continue now this year step out and start growing the Swan resource envelope and then continue to add more high grade down the road into reserves? Just I guess the question is, is Swan done or is Swan still open for more to grow?

[John Landmark:]

It's a good question Dan, John here. No, we certainly don't think it's done, but what if you look at our resource numbers well we certainly replenish what we have been converted as well. And whilst it would be shown on that long section image, you'll see that down plunge of Swan, it was obviously the Lower Phoenix material that came in this year. And there's a gap, which you see on the diagram between Swan and that, that gap only exists because we haven't got drill access. So during the year, we'll complete the decline connecting Harrier to Phoenix. And that'll give us true platform access to effectively close that gap. So I guess answer to your question, we'll continue to join the Phoenix system up as it plunges to the south. And we certainly anticipate bringing that into resource this year.

[Dan Rollins:]

And then last one for you, Tony. You mentioned at the end of the call discussions about allowing shareholders to participate more in return at the company given the growing cash balance. Basically having cash is not a concern but having too much cash can start to cause questions. Where do you see the potential here for a payout ratio on the dividend and as part of the value creation now looking at M&A?

[Tony Makuch:]

I think, again the company wants the shareholders I think -- where we look forward to getting value for shareholders. We continue to generate value with the drill bit and so we're going to want to continue to do that. We talked about potentially increasing our exploration efforts and trying to grow there. Definitely, we have to look at our dividend or dividend policy and maybe in line something more to the earnings potential of the company. And we're going to look at that in some form. But the other aspect, I mean, yes, there's been a lot of talk about M&A and there’s M&A activity happening in our industry and we prospered from it in the past. But going forward, I mean we still see some significant growth and we talked about going to 100 million ounces this year, but when you -- when we talked about -- we also pointed out about what we're doing at Holloway, what we're doing in Northern Territory for the growth at Macassa with the shaft and further potential growth at Fosterville and everywhere else where we fill our mills, is there’s still at least another 0.5 million plus of growth per ounce per year growth in the company. So that's a number one driver of our growth instead of going out and trying to buy that kind of a company. We want going to continue to grow with the diamond drill bit, we want to continue to grow with development of our own assets and -- organically and then we're going to look seriously at how we give value back to our shareholders.

[Dan Rollins:]

That's perfect and congrats and again with our free cash flow you start to look more like a royalty company these days.

[Operator:]

Your next question comes from one of Craig Stanley with Eight Capital. Your line is open.

[Craig Stanley:]

Just quickly from me. Just wanted to confirm that you said the step up drilling down plunge in the Swan, that’s not occurring right now, will occur in a few months time?

[Tony Makuch:]

So Craig, it is occurring now. Yes.

[Craig Stanley:]

Occurring now. Okay.

[Tony Makuch:]

So we've put eight on the ground rigs at Fosterville. 4 of them in the Harrier and the other 4 across the Phoenix.

[Craig Stanley:]

Secondly 50% of the throughput is coming from Swan. You see it staying at that level?

[Ian Holland:]

Yes, that's correct. So in broad sense Swan by tonnage is 50% of the reserve base. So over the three year period we’d see it as potentially in line with that sort of proportion.

[Craig Stanley:]

Okay. And then finally just coming back I know it was touched on briefly earlier. Just kind of same ways the Swan reserve grade actually went down even though you increased the top cut. Was it new zones coming in, were you guys remodeling something. What’s happening there exactly?

[Tony Makuch:]

Yes, just to recap, it's really the reserve from 2017 didn't go down, those blocks if anything went up. But the additional material that came in was really focused around inferred resource which was at the end of 2017 we reported as 36 gram material. So that material came into the whole combination. So you sum the two together and we would have had reserve grade somewhere in the 40s with the top cut increase we saw that increase to about 50 gram.

[Operator:]

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

[John Tumazo:]

Thank you very much and congratulations. Do you think something like a $2 special dividend is plausible given that with your guidance in the current gold price, the cash balances could roughly double this year? First question. Second one to Ian, now that you’ve mined 100,000 or 200,000 tonnes of ore from the Swan Zone, are the blocks reconciling greater than the uncut grades in the geologic model? Thank you.

[Tony Makuch:]

Thanks to hear from you John, Maybe I'll let Ian answer the first question -- the second question first and then we'll talk to you about the first question second. Does that fits with you?

[John Tumazo:]

Sure.

[Ian Holland:]

Thanks, John. So just on the grade reconciliation, we mined four stopes in Q4, we mined a first stope in Q3, so it's a smaller volume the net to be fair. It's in the tens of thousands of tonnes. So given that it is a fairly small sample size, I'll be a little cautious with what I say. But I think we're pretty pleased with the way the grades are reconciled. And if anything it's probably in line or a hit all those uncut grades as you mentioned.

[John Tumazo:]

Do you think that there are microstructures that when you drill at 10 or 20 meters centers more mapped like stock worth, parallel van loads, or transfer, structures or halos or something that's given you an extra 5% or 10% kicker that you wouldn't find from the space drilling?

[Ian Holland:]

Yes, I think that’s a fair comment. So the material that we're mining has been drilled to 12.5 meter center. But that only allows you to refine a certain geometry when we're developing it and then ultimately stoping it, we are seeing some more complexity and with that complexity we're seeing some genuinely spectacular mineralization.

[John Tumazo:]

Thank you.

[Tony Makuch:]

And relation to the dividends and I mean definitely we are generating a lot of cash John and we need to look at -- as I say we're looking at our dividend policy and looking at, how we make something work going forward. I don't want to leave you to think, okay, we can pay $2 a share dividend, special dividend. But I think you can get a sense that there's potential for some significant dividend growth or shared or cash disbursements potential to our shareholders in some ways. And we're going to look at that and we'll figure things out over the next few months and I'd say look forward to meeting and talking at the other AGM, so.

[Operator:]

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

[Steven Butler:]

The throughput rate this year and then into next year, you maybe already stated but I missed part of the call, my apologies. Are you talking 30 and 50 tonnes per day in that range in '19 growing to 1700? And then second question is the field, I know you talked about earlier Tony is 2,300 tonnes per day as mill capacity, is that at all foreseeable to be filled or do you need another Phoenix, Harrier a number 3 punching shoot or Robbin's Hill or other? Thanks.

[Tony Makuch:]

Okay. So you're talking about the Fosterville so may be I will let Ian give some color and then I will give some color to this.

[Ian Holland:]

Thanks Steve. So as I touched on earlier, we're projecting volume in 2019 pretty similar to 2018. So in that order was 1,300 tonnes per day or thereabouts. We expect to see that grow in 2020 and 2021 to more like 700, 800 tonnes today with volume increases from both Lower Phoenix and Harrier South that is there as they’re more fully developed. So towards either proportion to be similar, but sort of 50% Swan material, but our volume increased. With respect to the 2,300 tonnes per day, our current plans don't get it. So, it's really about the drilling and development programs or about '18 for those opportunities, because that's the big growth lever for us. We do need additional production fronts to be able to get to that point. Robbin's Hill is a part of that planning, but we think there's other opportunities as well. We've with other blocks and shoots within the system as well.

[Steven Butler:]

Okay.

[Tony Makuch:]

Yes, so like, some of the limitations are Fosterville is going through some significant growth there in capital area projects this year and into next year. And we have talked about growing and getting ventilation capabilities improve that debt, which is going to help us put more equipment in or improve productivity makes the conditions better for the people doing the work. We're looking at bringing in pace fill, that’s going to improve cycle times et cetera. And then we need all these to help us support increase development efforts as he and talk about whether it's developing Robbin's Hill with some other areas, which can bring new zones of mineralization into production. And that's also why we're doing a lot of the diamond drilling. We're doing to look for things that we can get, so we're trying to set ourselves up to be able to develop more and mine faster and more productively. And we're looking for new mineralization, so that we can bring it online to fill the mill. We don't show that yet in our forecasts and that's the opportunity that's there. So if anybody sits there and think that again where the story is finished or we reached our peak. We're putting a lot of money back into grow that.

[Steven Butler:]

Thanks Tony. And then remind me again guys you remind me again guys, you may be mentioned that the expiration budget for the greater or in mine or the Fosterville in ‘19, versus ‘18 as it a higher budget at Fosterville this year for exploration?

[Tony Makuch:]

Yes, so it is -- Steven that’s right. Yes. It's probably another 30 million on what was previously.

[Steven Butler:]

30 million on top, last year it was approximately do you know the number?

[Tony Makuch:]

I guess just the context in terms of drill meters we’re actually budgeting to do in the order of a 190 kilometers of -- 190,000 meters of drilling in 2019 compared to about 140,000 in 2018. In terms of I guess investment into the drill bit...

[David Soares:]

And Steve, that was about 30 to 35 last year.

[Steven Butler:]

Okay. So..

[Tony Makuch:]

Overall the drilling cost has come down, that’s one thing I should mention, we're increasing the drilling quite substantially, but the unit cost has come down considerably as well.

[Operator:]

There are no further questions at this time. I would now like to turn the call back over to the presenters for closing remarks.

[Mark Utting:]

Its, Mark Utting here. I just want to thank everybody again for joining us. As you heard, we had a very successful 2018 and are off to a good start in 2019. We had an very important announcement yesterday, it shows if anything, we're in the process of taking our operating financial performance to new even better level. On top of all that we've got a lot of attractive opportunities that we’re pursuing very aggressively. We see no lack of catalyst coming up to keep the momentum going for the company and its shareholders. And with that, I'll just say stay tune, there's going to be more to come. Thanks again for joining us. Have a good day.

[Operator:]

This concludes the Kirkland Lake Gold fourth quarter and full year 2018 conference call and webcast. We thank you for your participation. You may now disconnect.