Kirkland Lake Gold Ltd.
Q2 2017 Earnings Call Transcript

Published: 6 Aug 2017

[Operator:]

Good afternoon, my name is Casey and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Kirkland Lake Gold Q2 2017 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Mark Utting, you may begin your conference.

[Mark Utting:]

Thanks very much operator, and good afternoon everyone. Welcome to our Q2 2017 earnings call. With me today are several members of Kirkland Lake Gold's senior management team including Tony Makuch, President and Chief Executive Officer; Phil Yee, Executive Vice President and CFO; Pierre Rocque, our VP, Canadian Operations, Ian Holland, VP, Australian Operations, Doug Cater, our Vice President of Exploration for Canada, John Landmark, our Vice President of Exploration for Australia and Jennifer Wagner, our Corporate Legal Counsel. As I Today, we will be reviewing our results for the three and six months ended June 3. For Tony and Phil will be providing remarks on our operating and financial performance. We will then open the call for a Q&A session. The slide deck that we'll be referring during the call is available on our website at www.klgold.com. It's in the investor relations section and on the Financial Reporting and on the Events page. Before I get started, I will direct everyone to our forward-looking statements on Slide 2. Remarks and answers to your questions today may contain forward-looking information about future events on the Company's future performance. Please refer to detailed cautionary note in Slide 2 and in our financial disclosures and forward-looking information which is set out in the news release dated August 2, and in the MD&A for the second quarter of 2017. Also during today's call, we make be making to references to non-GAAP performance measures. A reconciliation of non-GAAP measures is available within the earnings news release as well as the MD&A for the period ended June 30. Finally, during the call, we will be comparing our Q2 and year-to-date results with prior period. Participants are advised that prior period for November 31, 2016 did not include the company's Australian operations which were added on that date through the merger of Kirkland Lake Gold Newmarket Gold. In addition to the year-to-date comparisons, results in 2016 include the assets of St Andrew Goldfields, principally the Holt and Taylor Mines from January 26, 2016 onwards. All figures discussed today are in US Dollars unless otherwise specifically stated. With that, I'd now like to turn the call over to our Tony Makuch, President and Chief Executive Officer of Kirkland Lake Gold.

[Tony Makuch:]

Thank you very much Mark and good morning to everyone on the phone. Before beginning, I'd like to thank the employees of Kirkland Lake Gold both in Canada and Australia, all of our suppliers, contractors, people that are really helping us to achieve the results we're getting. I get to sit here and people here at the table we get to sit and talk about the great things that KL Gold is doing. If those but those people are really doing the work and they are ones that are making it happen. So thanks a lot. Anyway, turning to the performance, I'm on Slide 4, Kirkland Lake Gold achieved strong results in the second quarter of 2017. Our production up 160,000 ounces or 23% higher than Q1 of this year. our unit costs were very low, operating cash costs were $482 per ounce, while our all-in sustaining cost averaged $729 per ounce. Both results for the quarter were well below our target ranges for the year and improvement from Q1 of 2017. Looking at our financials, I'm on now Slide 5, we have achieved strong earnings growth with net earnings of $34.6 million or $0.17 per share which was up substantially from last quarter. Very importantly, the company generated significant free cash flow in Q2 and first half of 2017. Free cash flow for the quarter totaled $45 million, up from $37 million in last quarter and close to double the level's in last year's second quarter. For the year-to-date we have generated free cash flow of $82 million. I said very importantly, in terms of cash flow, the ability to generate substantial amounts of free cash flow and build our cash position is the key to being able to achieve growth through exploration target, project development, tough enough to make a strategic investment at the same time as we reduce debt and rewarding our shareholders through the share repurchases and our new quarterly dividend. Turning to Slide 6, by far the greatest contributor to our record results in Q2 was Fosterville. Fosterville had an outstanding quarter and we have had more good news since then. Production at the mine was a record 77,000 ounces, 67% higher than the previous record in first quarter of this year. Fosterville's results was great, the average mill grade was 17.2 grams per tonne in the quarter that compares to 11.1 grams per tonne in the first quarter. Over the last two quarters, grades have consistently outperformed the forecast and in some cases they have outperformed by a large margin. In addition to strong production results, Fosterville also had very little low operating cash cost per quarter, operating cash cost at Fosterville averaged $220 per ounce sold. All-in sustaining cost averaged $388 per ounce. When you consider that our average realized price for the cost was $1,256 per ounce, those are very attractive margins earned. Based on the consistent grade outperformance we have seen as well as new drill data and some refinements of methodology, we received released an updated mineral reserve at Fosterville, this is now Slide 7. The update confirms that we have fully believed for some time that Fosterville is among the world's greatest underground coal mines. Based on the new underground mineral reserves estimate, we have more than double the number of ounces and came very close to doubling the average grade. New mineral reserve is over 1 million ounces, an increase 110% from the previous estimate. And the estimated underground reserve grade increased 86% to approximately 10 [ph] grams. Particularly noteworthy is the Swan Zone, which was previously described or defined as the Lower Phoenix Footwall system. The new reserve in the Swan Zone includes half a million ounces at 15 grams per tonne. We are very encouraged by what we see in this area which remains open for continued expansion. Generally, we continue to see significant potential to add more reserves and resources through additional extensions down-plunged at the Lower Phoenix and Harrier South gold systems. We also have other promising target in and around these deposits and have a large number of district targets within our 500 square kilometer land position. As a company, Kirkland Lake Gold now has two high-grade cornerstone assets, Fosterville and Macassa. One has an average reserve grade reserve grade of around 18 grams per tonne, Fosterville. The other has a reserve grade of 21 grams per tonne, Macassa. That's a very strong foundation for successful bolt-on. Turning to Slide 8, now I'm speaking of Macassa, we continue to see strong permanent production in cost year-over-year from our Canadian flagship mine. Production in Q2 was p45,699 ounces, an increase of 17% from Q2 2016. The increase reflects both higher tonnes produced and average grades. The grade was 13.9 grams per tonne for the quarter compared to 12.2 grams per tonne a year ago. Production was down slightly from the first quarter of this year when we produced close to 48,000 ounces. The difference was entirely related to grade offset by higher tonnes produced. The average grade in Q1 was 17.1 grams per tonne. The reduction in this quarter reflected mining in lower grade areas and the processing of more tonnes from our low-grade spot wells which are already on surface. Our cost performance at Macassa in Q2 remained very strong. Operating cash cost averaged $512 per ounce sold for the quarter, which is better than our target range for the year of 5.20 to 5.50 per ounce and was a 21% improvement from $645 per ounce in last year's second quarter. All in sustaining costs at Macassa average $793,000 per ounce sold in Q2 of this year. This was a 16% improvement from last year's second quarter both operating cash cost and all in sustaining cost were similar to last quarter. Turning now to slide 9 and looking at other mines in Canada both Holt and Taylor increased production from last year's second quarter. Bolt produced just over 15,000 ounces, reflecting both higher throughout and slight improvement in grades. At Taylor, we produced 12,200 ounces compared to 11,700 ounces in Q2 2016. The increase related to higher throughput which more than offset a reduction in average grade. The average grade in Taylor in last year's second quarter was 7 grams per tonne well above the reserve grade which was a function of the mine sequencing with a serious of high grade sold mines during that period. Over in Australia, our Cosmo mine produced about 10,000 ounces in the second quarter of this year. this was up slightly from the first quarter of 2017 but well below production rate at the mine in previous quarters leading up to the new market to a market deal at November. As announced in May of this, Cosmo was placed on care and maintenance effective June 30, 2017. The lower production level was largely a result of gearing the mine down ahead of suspending operations. I want to be clear that we continued to believe that Cosmo had significant potential to be a commercially viable mine, it is going to take a success with the drill bit and [indiscernible] promising result. The mine has been kept at state of readiness for when and if we are able to establish efficient reserves so we commence operations from here. Moving onto our results for the first half of 2017 now on Slide 10. We are pleased with the performance in virtually every area. As of June 30, we are positioned to meet our 2017 full-year consolidated guidance for all key measures. Also in the case of consolidated and all in sustaining cost and expected results at Fosterville, we announced further improvements regarding [indiscernible]. Production in the first half of 2017 totaled $290,700 ounces which compares very favorably to guidance we produced in May of 530,000 to 570,000 ounces. Looking at our targets, our first half cash was $521 per ounce, within our target range for the year. All in sustaining cost averaged $794 per ounce in the first half of 2017. That is the lower target range of $850 to $900 an ounce or better than our target of 850. Slide 11, looking at our revisions to guidance. This is based on our strong results for the first half a year and our expectations for Q3 and Q4 particularly at Fosterville. Yesterday we announced that our guidance for consolidated production has improved the second time this year to between 570,000 and 590,000 ounces. At Fosterville, we produced 123,000 ounces in the first half of 2017 based on the mine's strong performance and at following the reserve update, we now expect Fosterville to produce between 250,000 and 260,000 ounces versus previous guidance of 200 to 225. For the year we also expect Fosterville's operating cash cost per ounce sold better than the existing target range of 330 an ounce. As a result we are revising our cost guidance down for the mines between $260 and $280 per ounce sold. Other changes in guidance includes our all-in sustaining cost per ounce sold which is being improved to between $800 mad $850 an ounce from $850 to $900. As I mentioned we're averaging below $800 an ounce year-to-date and expect to continue to seek strong cost numbers during the second half of the year. We are also lowering our capital expenditure guidance between $160 million and $180 million from $180 million to $200 million per year. We were at just over $600 million invested at June year-to-date. We expect to see a base capital development pickup in increase purchase of mobile equipment and critical spares during the second half of the year. But having said that we now expect expenditures for these things to be somewhat less we had originally planned for the year and as a result we are lowering our capital cost guidance. Just before turning the call over to Phil Yee our CFO, I want to reiterate the importance of focusing on our profitability and free cash flow generation and being disciplined in managing as shown in Slide 12. We are investing aggressively and are producing assets to get the maximum value from our operations. In cases where we can't make the economics work to our standards, we are making tough decisions. We currently have three mines on care or maintenance, Holloway in Canada, and Stawell and Cosmo in Australia. It is through a strong focus on profitability and returns that we have been generating over $80 million of free cash this year, it is through this focus that we have grown our cash by $32 million at the end of June. And we have increased our cash at the same time we used $44 million to repay our 6% convertible debenture and have spent $21 million on exploration in Canada and Australia and used $12 million for strategic investments in Canada. In addition, we repurchased 1.2 million during the second quarter. and as of today, have repurchased about 2 million shares through our normal course issuer bid. We also made our first quarterly dividend quarterly dividend payment of July 14 of $0.01 per share at gains of about $1.6 million. Investing aggressively in exploration and growth while at the same time reducing debt, rewarding shareholders is a keep part of our business strategy and it is powerful combination of generating long-term shareholder value. I'll turn the call over Phil Yee, KL's Chief Financial Officer.

[Phil Yee:]

Thank you Tony, before I get started, I just want to provide a second reminder that all figures referenced are in U.S. dollars unless otherwise stated. I also point that our reporting period prior to November 30, 2016 do not include our Australian operations. Also Q1 and first half of 2016 results include Holt and Taylor from January 26, 2016 onwards. Starting of Slide 14, Tony has already mentioned our record results in Q2 of 2017. We had strong free cash flow of $44.8 million and net earnings of $34.6 or $0.17 per basic share. We also had record performances in a number of other key areas including revenue, EBITDA also our unit costs that is both operating cash costs and all-in sustainable costs. Turning to Slide 15, revenue for the quarter totaled almost 190 million, 13% higher than last quarter and more than double the quarter to 2016 level. Higher volume was the key contributor to the growth in revenues from both periods. Wholesales totaled just over 151,000 ounces, which is up 10% over last quarter and 110% over Q2 of last year. Gold prices were not that significant of a factor. The average realized price for Q2 was 1256 per ounce that compares to 1223 in Q1 of this year and 1271 per ounce in Q2 of last year. Turning to Slide 16 and turning to costs. Production costs totaled 73 million for the quarter. That was down over 10 million or 10% from the previous quarter, which is really a reflection of gold inventory movements based on differences between recovered and sold ounces in the two quarters. In other words it was largely related to timing differences. Compared to a year ago, production cost was significantly higher than 48 million reported in Q2 of 2016. That increase is due to the inclusion of the Australian operations. Same is true for the completion and deprecation costs, which were also sharply and for the same reason, the inclusion of Australia following the Newmarket transaction. On Slide 17, far more significant in terms of profitability, unit cost performance, as you've heard from Tony very strong in quarter two of 2017. Our operating cash cost was $482 per ounce sold which represented 15% improvement from last quarter and was 27% better than 666 per ounce sold in quarter in Q2 of 2016. The demand of higher grade on production was the overriding contributor to the strong cost performance. All-in sustaining cost averaged 729 per ounce sold. That was a very low number and is well below the full-year target we have during the second quarter of $850 to $900 per ounce sold. All-in sustaining was 16% better than the previous quarter and 26% lower than Q2 of 2016. Obviously, low operating cost were a key driver of the improvement. We also had lower sustaining capital expenditures per ounce sold compared to both prior periods. That brings to the capital, on Slide 18, our capital expenditures for the quarter totaled 29.4 million. For the year-to-date, our capital expenditures totaled 61.7 million which compares to our guidance of 180 million to 200 million for the year. In our 2017 plan, there is some reading of capital for the second half of the year due to the timing of capital or the timing of equipment purchases and critical spares as well as timing of planned capital development. We have seen some development work plan for the first half of 2017 that will get moved to the second half of the year. As Tony indicated we may not get all the work done during the year that we have anticipated and as a result have reduced our CapEx for the year. On Slide 19, one final word on earnings. Strong growth in earnings was achieved notwithstanding the fact we had substantially increase to provision. We spend almost 12 million on exploration on Q2 of 2017. That was up about 2.5 million from Q1 and over 8 million from Q2 of 2016. If you've seen our press releases of late, you will know we are having significant exploration success at a number of our operations particularly Fosterville and Macassa. We are very commitment to exploration and by year end, expect to be within our guidance for the year of 45 to 55 million of exploration spending. On Slier 20, turning to cash and cash flow, and we mentioned strong free cash for the year of 81.9 million at the end of June. Generating strong cash flow was a key to these results. So far in 2017, it has allowed us to continue to build the strength of the balance sheet while also using our cash to support the growth and reward of shareholders. Cash and cash equivalents at June 30, 2017 was 267.4 million, 32.5 million or 40% increase from the end of last year. As you've heard, we repaid our 6% of debentures at the maturity date on June 30 from our existing cash. That amount equated to 43.8 million, it's netted out to 4 billion cash balance. Also netted out is 12.7 million of strategic investments made during the second quarter. later this year we also have the remaining 62 million or 7.5% convertible debenture coming due on December 31. To conclude financially, Kirkland Lake Gold is in a very strong position. Through our portfolio of quality high grade assets we are generating large amounts of free cash flow. Our ability to generate cash positions us to fund our growth and maximize the value potential of our asset and identifying new opportunities while also rewarding our shareholders and continuing to maintain a very strong balance sheet. With that I'll turn the call back to Tony.

[Tony Makuch:]

Okay thanks Phil, and actually we get so caught up in trying to present stuff and we can't [indiscernible] he think it's a very special company, there is a lot of very special people, people ore bodies and lot of good things are having and goods to come. So I don't want to lose that in how we are getting the presentation across to you for people who are listening. Here I am going to start on Slide 21 here, or Slide 22 I'm sorry. To summarize, we had very strong second quarter and first half of 2017. We are very well positioned to achieve our full-year guidance. in fact we were able to improve our guidance in a number of areas. In the cases of consolidated production and both production and cash cost at Fosterville, we've been able to improve guidance twice this year already. We are now targeting total gold production of 570,000 to 590,000 ounces per year which is between 250,000 and 260,000 have come from Fosterville. A significant improvement quarter-over-quarter and significant improvement year-over-year from Fosterville. With strong operating performance we've able to generate $80 million of free cash flow in the first six months of this year. we fully expect to continuing to generate strong free cash for the balance of the year and we're continuing to build the strength of our balance sheet. We recently had some very positive development in addition to our strong operating and financial results. Most notably the update reserve at Fosterville is a very significant development for our company. We recently had an analyst trip to Fosterville, and without speaking for everybody, I think the visitors how went were able to get a good sense of the site that remains at that operation the fact that the mine shows very, very well and as we say it's probably one of the - definitely a world class mine both in operating and safety performance and in terms of grades and et cetera. We don't think we're even closer to realizing the full potential goal at Fosterville and the exploration off site is significant. And that brings to some areas on exploration where we've had some very encouraging results this year. In the second quarter we issued results from Fosterville, Macassa and Taylor, all of which demonstrated extensions of high grade mineralization and discovery of new areas of gold mineralization in the existing infrastructure. We have an aggressive exploration program, exploration program plan in 2017, we're executing well on that program and they is surely to be more news to come. We have not discussed these results much on the call, we are happy to answer any questions about them, and if you do have, John Landmark and Doug Cater are here if anybody ask questions on that. and I can tell you that exploration will be featured in one of our remaining 2017 quarterly calls. With that we'll be happy to take any questions. Thanks.

[Operator:]

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

[Cosmos Chiu:]

Maybe just a few questions from me. Maybe first of on Macassa, I'm just trying to get a bit of understanding in terms of your low grade stockpile strategy here. I believe you put in about 15,000 tonnes in Q2, up from 5,000 tonnes in Q1. First I wonder how much of the low grade stockpile do you still have and what are you trying to do with the low grade stockpiles. Are you trying to get to like a certain tonnage in terms of at the mill are you trying to get to or how do you manage the grade?

[Tony Makuch:]

In terms of the low grade stockpile, first of, what we take advantage of a low grade stockpile which is we [indiscernible] surface. It is used to supplement the mill and build additional mill fees over and above our bucket. This is the reason why it was more processed in Q2 versus Q1 was really a combination of winter and weather and the fact that the things warmed up and then we're able to start accessing the stockpile. In terms of managing grade et cetera I will leave up to Pierre Rocque, the VP of Canadian Operations to give you some color.

[Pierre Rocque:]

In terms of low-grade stockpile our intention is not to process any for the remainder for the year. Right now we drew a line with essentially in just sending high grade material to the process plant.

[Cosmos Chiu:]

Maybe a follow on question for Pierre as well, if you back out the low grade tonnage in Q2, I get to about 90,000 tonnes. That's higher grade. Is that what you're capable of doing in terms of underground throughout. I guess there is new equipment that's coming in, in the second half, is that new equipment that's going to be in Macassa and is that going to help with underground throughput to you believe?

[Pierre Rocque:]

Certainly I would say is yes, we are targeting 1,000 tonnes per day. So with the new equipment we believe that we will be able to achieve that.

[Cosmos Chiu:]

And then maybe on a little bit more on that as well I guess. As Phil sort of mentioned at 160 million to 180 million now in terms of your CapEx budget. You've done about 60 million in the first half as we heard, some of that money in Q2 will be spend on equipment at Macassa, is that what it is, is that it, could you give us a big more color in terms of the higher CapEx in the second half.

[Pierre Rocque:]

The main two items where we're spending capital, the first one you identified as the equipment and the second one is accelerating our capital development.

[Cosmos Chiu:]

Capital development where?

[Pierre Rocque:]

Well, we do have a few initiatives at the site. The first one, the one that everybody is aware is development to the SMC. And then we also have exploration, development at various levels of the old mine if you want to call this way, so we're establishing some basis for Doug and his team to continue the exploration, not just of the SMC, but also for the all four grade as well.

[Cosmos Chiu:]

Okay. So a lot of that higher CapEx in the second half is going to be at Macassa and not at Fosterville?

[Ian Holland:]

The design profile for Fosterville as well, there is an additional equipment arriving in second half. It's fleet renewal. So development drills, trucks loader and additional underground capital development as well.

[Cosmos Chiu:]

And then I guess, overall, I guess Phil sort of mentioned it, but I just want to categorize this, the decrease in 2017 in terms of CapEx budget, is that more deferral and savings, are we going to see some of that CapEx that's been saved in 2017 coming in 2018?

[Phil Yee:]

Short answer is Macassa is yes, there is, some of the program has been deferred later. Fosterville?

[John Landmark:]

Yes. At Fosterville, we'll essentially spend the full budget in terms of capital. The Cosmo actually are there as well. So there is a component there and some of it also was related to what we do at, yeah, for the most part, we intend to get a lot of our capital programs done. It is something that has been deferred.

[Cosmos Chiu:]

Maybe that sort of leads into my next question as well, I saw that on the financial statements you booked about $4 million for care and maintenance. I believe that might be for Holloway, Cosmo and Stawell, could you remind us, is that the running number each quarter?

[Tony Makuch:]

At this point in time, probably, we're going to be addressing some of these repair and maintenance at Stawell and Holloway. So it is, but there is going to be some changes coming up in the second half of the year.

[Cosmos Chiu:]

Okay. And I guess Tony, that would equate to, at least right now, annualized about $16 million a year. Given the maintenance and care and maintenance cost, would you consider selling these or monetizing these assets?

[Tony Makuch:]

Yes. We're considering it. We have considered it and we are working on things. Part of this is in a production ready mode and just to try get a sense of what might be there, we have some alternatives and different assets up very shortly. So we wanted to make sure we understood what was happening there at each of them and now as we're going forward, we don't understand the intend to spend $16 million year-over-year for these assets.

[Cosmos Chiu:]

And then maybe one last question from me here Tony, you've bought back some shares with your share buyback program. You first put that in place in May, so while share prices were lower, your share price is actually down pretty well this year, how does that sort of factor into your desire to continue to buy back shares?

[Tony Makuch:]

We still think there is lot of value in our shares, sorry, not realized yet, we're still going to be continuing to work at normal course issuer bid and [indiscernible]. We think there is still significant price appreciation in these shares. We support a lot of what the analysts have in terms of target price for the company and we will buying back our own shares.

[Operator:]

And your next question comes from Steve King with M Partners.

[Steve King:]

Just a couple of quick questions on the Fosterville guidance. How much of that do you feel is driven by the great bump and do you have any, one way or there, we're looking at getting some new working areas established, are you still targeting sort of 600,000 tonnes for the year, and what component is the output versus the grade for the increase in your guidance?

[Tony Makuch:]

For 2017, it's always a variety of function. So tonnage is pretty consistent in the second half relative to the first half. So sort of numbers that we were speaking about and your visit remain consistent. So it is a great increase. The opening up on other production fronts as future benefits, but not in 2017.

[Steve King:]

Okay. And just in terms of the development, looking at the joining up Harrier and Phoenix, could you add a little bit of color, I guess, and this may relate to some of the deferred expenditures you're mentioning on the start I guess the duration, the budget and when would you expect to have some drill stations, the first drill station set up in that area?

[Tony Makuch:]

Yes. Specifically the link decline between Harrier and Phoenix has commenced, so in progress, we'll get it over the course of, in 2018, but we will be aggressively drilling behind the development of that, so it will be drilling in the latter part of this year. It's important to say there are other platforms already available to us. We'll drill in south of the Phoenix, so we're doing drilling there as well; it's not just depending on the dateline.

[Steve King:]

Okay. So in terms of the capital budget that we have remaining, most of the heavy lifting with regards to development at Fosterville to that project will happen in 2018. Is that a fair statement?

[Tony Makuch:]

No. A significant amount of the development will occur in the second half of this year.

[Steve King:]

Okay. So that's included in essentially the numbers that we were given today then?

[Tony Makuch:]

Yes.

[Steve King:]

Okay. Just one other quick question on Taylor in terms of the throughput, sort of the target for throughputs were a little bit behind and the guidance was lowered and largely seems to be related to throughput, what are the targets for the second half of the year and into 2018?

[Phil Yee:]

So for 2018, well, the second half of the year, we're targeting about that 1000 tonne per day over there. That will catch up a little bit from what we could not accomplish in the first half and for 2018, we'll be essentially the same.

[Tony Makuch:]

What's happened there in the first half of the year is that we believe the permitting both for power site and getting our gold plan managed in winning that as well with the increased production from the mine. And we have a slight preference to get up to 1500 tonnes per day for it and we've seen them 100% and we've got for more power, the increase of power to well over 5 megawatt. [indiscernible]. Our target, we've tried permit for 1500 tonnes per day, we don't expect to be there at 2018, but we [indiscernible].

[Steve King:]

Okay. I guess a final question on the equity or your investment strategy, obviously you've been active on a couple of small players in Canada, could you add a little bit of color on what your thesis is behind that with that change, are there particular areas or just a little bit of color on that strategy?

[Tony Makuch:]

Well, I mean we're looking at and again part of our growth initiatives for the company, if we see some high perspective on the geological or exploration stories, that are coming to us, we see a point in being able to react quickly and trying to get a foothold or getting in the [indiscernible]. We see some special development, we think the area in Northwestern Quebec has got some pretty interesting things happening and so we're moving to the target and trying to help in terms of what we see there. Those are the things we're looking for. It's part of us building up our the core development projects, we have exploration that goes on within our existing mine operations, we have explorations that goes on in our existing mine property outside of our, away from our shafts and mills. And then we're also working at sort of more regional exploration on our asset and then working on other stages to look at investments or taking strategic investments and opportunities that we see getting early and help to make a difference and see where it goes.

[Operator:]

Your next question comes from Steve McCarty with Charles Schwab. Your line is open.

[Steve McCarty:]

Real quick question, I know there has, I believe there has been some talk about listing the US shares, KGDLF on the New York Stock exchange as opposed to the over the counter exchange, is that something that's in progress that you comment on?

[Doug Cater:]

That is something that we have been seriously considering and that is in progress we are very close to making a decision that we'll be listed for whether we did it for a while, but again it is something that's definitely in front and center for the company. Are we going to get value from that?

[Steve McCarty:]

I think you'll get great value by doing that. And I also noticed, can you comment, it appears that the percentage holding in the GDXJ Junior Miners Index significantly got reduced. It didn't seem to affect the share price at all, but it appeared to me that the percentage holding in that ETF was about a little over 5%, it looks like it's dropped to about 2.75%. Is that accurate?

[Doug Cater:]

Yes. That is accurate, and hey, we can't speak to what GDXJ does in terms of volumes on the stock.

[Steve McCarty:]

Yeah. I don't think it's a bad things. I think it's, maybe a good thing.

[Doug Cater:]

Yeah. That's right. Part of it in the past was, I think we were picking up our own success of share price performance that pushed us up that we may be over waiting for kind of [indiscernible]

[Steve McCarty:]

Well, at the rate you're growing, pretty soon, you're going to be in the GDF, still in the juniors. Congratulations.

[Doug Cater:]

Thank you.

[Operator:]

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

[John Tumazos:]

Two quick questions. The Swan Zone or Lower Phoenix Footwall, 58.8 gram per tonne area. If you ran it through the mill all at once, 2300 tonnes a day would be 119 days or four months. When do you think that's going to go through the mill is my first question. And then I'll follow with one on Macassa.

[Tony Makuch:]

I'll let Ian Holland answer that question.

[Ian Holland:]

Yeah. The vertical extent of the Swan Zone is 100 meters plus vertical. So it will be currently below the big line. So it won't start into production until some point next year and will be mined at a certain rate. It certainly won't be mined in one batch and processed rapidly, but the entire grade will be mined.

[John Tumazos:]

Is it reasonable to model something like July 1 next year to July 1 the following year?

[Ian Holland:]

No. We couldn't give that detail, but it's also fair to say [indiscernible].

[John Tumazos:]

So it might take a little longer?

[Tony Makuch:]

You can probably think it's going to be mined out definitely within the next three years. And if we can go master on it, as Ian alluded, some of it is the vertical extend and some are vertical [indiscernible] we're going to focus on it, but we would have some limitations in terms of tonnes per day that we could mine. But when you're losing 2300 tonnes a day from that zone, the tonnes per vertical won't allow us to mine at that production rate from that zone.

[John Tumazos:]

Concerning the June 29 Macassa release, if I am reciting at right the South mine extended 259 meters East, the lower South mine 60 meters and the South mine complex 65 meters south, should we interpret that the mineral envelop got that much bigger and can we multiply length times width times thickness and divide by specific gravity to estimate the tonnes you're adding for example, would the third dimension be 100 feet or 100 meters wide? I got excited about that.

[Tony Makuch:]

Doug Cater can maybe give some color on that.

[Doug Cater:]

Yeah. John, you're correct. What we're doing at this point, we've got the 5300 level drilled throughout the east and we're winning out both to the East, results back to date confirm that SMC style mineralization does in fact extend 250 meters to the East. What we're doing now is we're going back and we're filling, in filling that area to in fact confirm the dimensions of the mineralized envelope. So we're doing that as we speak right now John.

[John Tumazos:]

So the rough number I did on the back of my envelope was a 1000 feet wider times 200 feet deeper times 100 feet thick, I guess the third dimension was 100 feet and I divided that by 13.5 for specific gravity or 2.7 of your metric and that was 1.5 million tonnes and then I multiplied that by two thirds, and thought it was 1 million ounces. Somewhere in the part of the release you said there is no reserve or resource significance to it at all, so I thought your, maybe the attorneys got overboard.

[Tony Makuch:]

The third dimension still needs to be worked on, John. And in terms of what you're doing, you got specific gravity rates, probably got length times height, right? It's the width of the thickness, that's what we need more work in, it might not be mineralized at that continuous thickness of 100 feet, might be some parallel mineral systems in there. But it's and it will have some material impact in terms of resources increase and reserve increases as we progress.

[John Tumazos:]

John Landmark, the Fosterville resource tonnage addition was 6.3% and at June 28, Macassa really seems to me like it keeps up with the chances. Excuse my humor.

[Operator:]

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

[Dan Rollins:]

Yeah. Thanks very much. Just with respect to Fosterville, it looks like if you get the implied reserve grade or the grade you're going to need to mill to get your guidance this year at similar throughout is around 16 gram a ton, do you expect something consistently through 2018 until you start to be able to tap into the Swan Zone.

[Ian Holland:]

It's Ian here. We would broadly expect a pretty similar grade profile in the second half versus the first half in 2017. It's also fair to say, the reserve grade from the most recent release is short of 18 grams. But the deepest and most southerly component which is the Swan, it's the highest grade, so we would expect that to emerge overtime. So it's not, probably not reasonable to straight line that over 2018 if you follow what I mean. We want it to be a more staged increase as we access the depth extends of the Swan reserve.

[Dan Rollins:]

Yeah. Just trying to get it, because if you take out the Swan, you're looking at about 10.2 gram a tonne for the rest of the underground, which is well below what you're doing in Q2 and what you need to do Q3, Q4 to hit your numbers. So I guess obviously you're going through a bit of a higher area and then as you get into the Swan, you'll start to pick up some of that lower assets in the other part of the underground to have a bit more of an efficient blend. Is that correct?

[Tony Makuch:]

That's correct. But part of that is well the Harrier south reserve is in lower grade and isn't accessed yet. So the actual area that we're mining in Lower Phoenix is actually in line with sort of results that we're seeing. So when we're assessing the Swan reserve, we will also be accessing the Harrier South reserve. So it won't be just a high grade from Swan at that point, and let's not lose around 10 gram per tonne material through the mill.

[Dan Rollins:]

No. It's pretty good. I was just saying, but when you're given the run rate you're at, I think the risk is everyone starts to assume that's consistently throughout and then it doesn't happen, I think that's the risk. I'm just trying to get an understanding, is it 16 gram or is it going to be closer to 15 next year and then it will be up and down, but just trying to get an understanding of how this looks for the next couple of years before Swan comes in?

[Tony Makuch:]

That's good point and we recognize we have to make sure we get good color out there for guidance for the market where people don't either get ahead of us or get ahead of us in terms of what we expect.

[Dan Rollins:]

Okay. And just on Swan, just given the complex processing mill you have there, how much of Swan on a percentage basis daily throughput could you actually put through the mill without potentially buggering up the system?

[Tony Makuch:]

It's a good question. Yeah, as you know, bacterial oxidation is the heart and soul of the processing plant now. This material by itself doesn't have a significant supplier component. So it would be blended, but given its geometry and the mining rate, we've seen issues with blending material. I wouldn't try to give a maximum rate on that. I think there is some flexibility with that in terms of our gravity circuit that we've installed last year that allowed us to be able to cope and adjust with that. But we would be a long way from proposing that, 100% of it.

[Dan Rollins:]

Okay. Really appreciate the color on Fosterville. And just at Macassa, one last question from me, you saw pretty good drop in the per tonne rate based on what the operating cash costs were prior to the royalties. I think it was around USD225 for the quarter, do you think that's a sustainable rate now for Macassa going forward or do you expect it to be up and down for a few more quarters before stabilizing.

[Phil Yee:]

At this point in time, we anticipate that it won't be sustained.

[Operator:]

Your next question is from Mike Parkin with National Bank.

[Mike Parkin:]

Most of my questions were answered. Maybe just a couple of housekeeping ones. What would you estimate your Australian dollar and the Canadian dollar exposure would be to your OpEx at those respective assets? Is it around like 75%?

[Phil Yee:]

No. Mike, it's Phil here. I think it's probably higher than 75. Most of our costs are in local dollars in Canada and Australia. So probably I'd say 90% to 95%. Was the question, how much was Australian or Canada [indiscernible]

[Mike Parkin:]

No. Like at Fosterville, what percentage of the OpEx would be in local currency?

[Phil Yee:]

95%

[Mike Parkin:]

Okay. There is a mention there that with no currency hedges or plans to, is that something that you're watching carefully with the Canadian down, Aussie dollar strengthening here into the back half or what's your view on that on a go forward basis? How do you look at it?

[Phil Yee:]

We monitor it on a regular basis, Mike. We have been and continue to do so. At this point, we don't have any definitive plans to have that program in place, but if the circumstances warrant that, we'll look at them.

[Operator:]

And there are no further questions. Thank you. At this time, I will turn the call back over to Tony Makuch, President and CEO.

[Tony Makuch:]

Okay. Well, thank you very much for your questions and maybe in closing, I'll just give out four key points I want to leave you with. One, Kirkland Lake Gold is a company with high grade, low cost mines that is performing extremely well relative to its guidance. Two, we are a company that generates substantial amount of free cash flow and is building cash on its balance sheet, so a very profitable company. Number three, we are a company that at the same time is investing aggressively in exploration and growth. So that's part of being a core competency of the company and we're having considerable success doing that. And four, finally, we are a business that understands the primary objective of a public company is to create value for our shareholders. That is why in addition to achieving our operating targets and investing for growth, we are also rewarding our shareholders with our share repurchase plan and as of July, our quarterly dividend payment. A lot of good things going on in KL Gold and we're a company with a lot of momentum. We look forward to maintaining that momentum and updating you on our continued progress very soon. Thank you very much for participating in today's call and we encourage anyone with additional questions, contact Mark Utting or myself. You will be asked to get back to you with any response as quick as possible. Thanks again and hope everybody has a good day.

[Operator:]

And ladies and gentlemen, this concludes today's conference call. You may now disconnect.