Pretium Resources Inc.
Q4 2018 Earnings Call Transcript

Published: 15 Feb 2019

[Operator:]

Thank you all for joining us this morning and welcome to the Pretium Resources 2018 Results and 2019 Outlook Conference Call. As a reminder all participants are in a listen-only mode and the conference is being recorded. After the presentation there will be an opportunity to ask questions. The conference call today is being webcast live and available along with the presentation slides on Pretium's Web site at pretivm.com. I will now turn the call over to Mr. Joseph Ovsenek, Pretium's President and CEO.

[Joseph Ovsenek:]

Good morning, everyone. Welcome to our 2018 results and 2019 outlook call. Participating on the call with me today is our CFO, Tom Yip. On today's call, I will comment on operational highlights and guidance for the coming year. And will then, turn the call over to Tom, who will comment on our fourth quarter and full year 2018 financial performance. I will close off with a look ahead to our key near-term catalysts before opening up the call to your questions. Before we begin, I refer you to the cautionary language included in our news release issued yesterday as well as the management's discussion and analysis for the same periods. These are available on our Web site and have been filed on SEDAR. Please note all dollar amounts mentioned on this call are in U.S. dollars, unless otherwise noted. In the fourth quarter of 2018, we again recorded a profit, our sixth consecutive quarter with positive adjusted earnings. We have been profitable every quarter since the start of commercial production of Brucejack back on July 1, 2017. Our profitability is principally due to the sound economics of Brucejack and the hard work of everyone at the mine, Smithers and here in Vancouver. Our thanks to the team. For the year 2018, our first full year production, we produced 376,012 ounces of gold and generated $454.6 million in revenue on 367,428 ounces sold for the year. The all-in-sustaining cost per ounce of gold sold was $764 for the year resulting in adjusted earnings of $99.3 million or $0.54 per share. Our cash margin per ounce of gold sold averaged $608 over 2018. The Brucejack mines produced 96,342 ounces of gold in the fourth quarter of 2018 with 89,011 ounces sold, we generated $108.6 million in revenue for the quarter resulting in $20.2 million in adjusted earnings equivalent to $0.11 per share. In December, we received the amended permits increased production rate at Brucejack by 40% to 3800 tons per day. Also in December, we used our significant cash build to repurchase the precious metal stream and facilitate the refinancing of our construction credit facility. Goals we set for ourselves this time last year. With these milestones achieved, we ended the year 2018 with a cash balance of $45.4 million and a simplified balance sheet. Turning to Slide 7, I look at gold production at Brucejack over 2018. In 2018, we produced 376,012 ounces of gold at a grade of 11.9 grams per ton. Our production profile improved at the beginning of the second quarter following the successful implementation and integration of the grade control program into our short-term mine planning, which was reflected in the average grade increasing to 12.9 grams per ton for the last nine months of the year. During the first half of 2018, the mine produced over 187,000 ounces of gold, achieving gold production guidance of 150,000 to 200,000 ounces. We achieved 95% of our gold production guidance for the second half or 188,983 ounces of gold versus the guided range of 200,000 to 220,000 due to a grade control program overcall in December. We have since reviewed and revised our long-hole sampling protocols and audited our long-hole sampling procedures to improve the accuracy of grade estimation from our long-hole sampling. We see improvements resulting from this review and audit can expect to continue to see improvements over the next few months. We have also revised our long-hole drilling procedures to provide for forward slashing and stoked top cuts and parallel long-hole drilling. We are using parallel long-hole drilling in place of fan drilling wherever possible, which will remove any sample bias present in our long-hole ring drilling. Finally, reconciliation to the Valley of the Kings global resource model for 2018 was approximately 90% based on mined wire frames and shapes. The reconciliation to the resource model for the period April 1, 2018 to December 31, 2018 improved to approximately 92% when the grade control program became fully operational. Overall, reconciliation improved in 2018 compared to the period August 1, 2017 to December 31, 2017, when reconciliation to the resource model was approximately 75% to 80%. We intend to provide an overview of the reconciliation process and results at a technical session we plan to host in the second quarter of this year. Despite the challenges of mining at deposit with variable grades, the hallmark of the Valley of the Kings deposit, the Brucejack mine remains sustainably profitable. With the experience we have gained operating over these initial six quarters of production, we are well-positioned to consistently achieve our production and cost guidance. Turning to Slide 11. I look at all-in-sustaining costs over 2018. Our all-in-sustaining cost per ounce of gold sold improves starting in the second quarter with increased sales. For the second half of 2018, our all-in-sustaining cost was $745 per ounce sold, which was well within our financial guidance range of $710 to $770 per ounce of gold sold. Turning to guidance. For 2019, gold production at Brucejack is expected in the range of 390,000 to 420,000 ounces. With our production guidance accounting for the production ramp up from 2700 tons per day to 3800 tons per day over the course of the year. Production is expected to average 3500 tons per day in 2019 with production starting the year off at roughly 3000 tons per day and ramping up to 3800 tons per day by year-end. In order to operate sustainably at a rate of 3800 tons per day, the production ramp up requires in addition to mill upgrades, the expansion of the underground development to the west and east and at depth. Gold rate is expected to average 10.4 grams per ton over the course of 2019. The lower grade in 2019 reflects the sequencing of stopes in the mine plan to achieve the development ramp up to 3800 tons per day, working within geotechnical and ventilation constraints. The average gold grade is representative of the areas to be mined in 2019 and is not representative of the estimated life of mine grade, which will be provided in the second quarter. We note that production is weighted more heavily to the second half and fourth quarter of this year. All-in-sustaining costs for 2019 are expected in the range of $775 to $875 per ounce of gold sold. Our all-in-sustaining costs include sustaining capital of approximately $15 million associated with one-off capital items, out of the total sustaining capital budget of $30 million. It also includes expense costs of approximately $23 million associated with the growth of Brucejack. One-of-sustaining capital items include $6 million for access roaming camp upgrades; $2 million for an underground maintenance shop and $2 million for a backup underground pace booster pump. Expense costs include $17 million for the increase in underground development to 1000 meters per month from 700 meters per month as part of the production ramp up to 3800 tons per day and $6 million for underground exploration focused on reserve expansion and discovery of the source pour free for the Valley of the Kings. Our all-in-sustaining costs less one-off capital items and expense growth costs are approximately $675 to $775 per ounce of gold sold. Looking ahead to 2020, we expect our all-in-sustaining costs to decline. Turning to Slide 14, this slide shows an aerial view of a portion of the Brucejack mine property. The Brucejack lay in the top right corner and Brucejack mine infrastructure on the southwest shore. The Valley of the Kings are high grade zone is located at the bottom left. The dark blue area represents a projection to service of proven and probable reserves. And the light blue area represents a projection to surface of indicated and inferred resources. You can see that there is significant room for resource expansion into indicated and inferred resources and the Valley of the Kings remains open to the east, west and at depth. As important in the lower right-hand corner, you can see the flow doom zone, which we discovered in 2015 as part of a grassroots exploration program. We drilled a number of holes into the flow doom zone in 2015 and all of them intersected Valley of the Kings down mineralization. We believe that the flow doom zone is an extension of the Valley of the Kings. Turning to Slide 15, this slide is a section view of the Brucejack mine property looking to the north. But the Valley of the Kings in the top left corner and the flow doom zone in the center. In 2018, we drilled two deep holes towards the flow doom zone from the underground of the Valley of the Kings with two objectives. The first objective was to confirm the continuity of mineralization from the Valley of the Kings to the flow doom zone, which we were successful in accomplishing. The Valley of the Kings down mineralization intersected throughout the gap between the Valley of the Kings and flow doom zone. The second objective was to locate the source pour free for the gold mineralization at the Valley of the Kings and flow doom zone. Both deep holes indicated mineralization indicative of a pour free nearby, which we then followed up with a surface geophysical program and mineral chemistry evaluation. Our underground exploration budget for 2019 is primarily focused on expanding reserves in the Valley of the Kings and includes the start of reserve expansion drilling towards the flow doom zone to the east. The exploration budget also includes funds to follow up on the deep holes from 2018, with two additional deep holes targeting the source pour free for the Valley of the Kings and the flow doom zone. Now, I will turn the call over to Tom to review our financial performance for the fourth quarter and full year 2018.

[Tom Yip:]

Thank you, Joe, and good morning everybody. Turning to Slide 18, as we continue to optimize our operations, during the quarter, we sold 89,011 ounces of gold at an average price of $1204 per ounce for total revenues of $108.6 million. For the year, we sold 367,428 ounces approximately 8,500 ounces less than 376,012 ounces produced. Total revenues were $454.6 million for an average of $1231 per ounce for the year. Included in our revenues were TCRCs related to our concentrate sales, which totaled $4.5 million for the quarter and $17.1 million for the year impacting our revenues by approximately $49 and $46 per ounce respectively for the quarter and year. Otherwise, we want to realize $1,253 per ounce for the quarter and $1,277 per ounce for the year, which is similar to spot prices. Our cost of sales which include production cost, depreciation, depletion, royalties and selling costs average $814 per ounce for the quarter and $827 per ounce sold for the year. The total cash cost per ounce sold averaged $610 for the quarter and $623 for the year. The higher average costs for the year reflects the lower grades process and result in lower ounce production in sales which occurred in the first quarter of 2018. This yielded earnings from mining operations of $36.1 million for the fourth quarter at $150.6 million for the year. We continuing to show robust earnings from mine operations this year and injecting our corporate G&A cost of $15.8 million, we generated operating earnings of $134.8 million. There are two significant non-operating items on our P&L. The first is net interest expense of $64.2 million for the year, which is primarily related to our project financing. With a new syndicated bank facility as well as our ability to generate significant cash flow to service our debt, the interest cost going forward is expected to be significantly less. The second item is a loss on financial instruments at fair value. The fair value of these items is based on future gold silver prices, interest rates and production profiles that adjustment was a loss of $17.1 million for the year. This fair value adjustment has been significant since September of 2015 and with the refinancing and [by roll] [ph] of the stream in December, the fair value adjustment will now be limited to movements of the off-take obligation. Lastly, we incurred a $16.9 million of tax expense during the year. This excess of $4.2 million for the current BC mineral tax and $12.7 million related to deferred taxes. The effective tax rate is 31.5%. This is lower than our statutory effective rate of 36.5%, as we recognized loss carry forwards previously accumulated. Currently, we only pay BC mineral tax at a rate of 2%, which will increase of 13%, once our significant tax pools are drawn down, we expected over the next several years. Net earnings for the year were $36.6 million or $0.20 per share. We adjust earnings for items that we believe are not reflective of the underlying operations of the company. These include non-cash items such as loss on financial instruments of fair value, amortization of the discount on the credit facility, deferred income taxes and convertible notes accretion. The adjusted earnings were $99.3 million or $0.54 share for the year. Turning to Slide 22, in terms of liquidity and cash flow, for the year we generated $197.2 million of operating cash flow, averaging $49 million per quarter in 2018. Together with net proceeds of $472.4 million from the new syndicated bank facility, this enables us to repurchase the 8% stream obligation for $237 million and repay the construction credit facility of $422.7 million, which include a principal and accrued interest from September of 2015. We spent a total of $32.9 million on CapEx, which includes $8.6 million of construction payments in Q1 of 2018. We ended the year with $45.4 million in cash. With the refinancing activities completed in December, we reduced our total debt by approximately $180 million and our balance sheet has been simplified. The syndicated bank facility totals $480 million. This facility consists of a term loan of $250 million which we will repay in 15 equal quarterly payments commencing in June of 2019. And a $230 million revolver which requires a reduction of $30 million to $200 million in June of 2019 and thereafter the revolver will be due as of December 2022 maturity. Under the bank facility, we have up to $40 million available per year commencing in 2020 to repurchase shares or pay dividends subject to compliance with certain financial covenants. And finally to give a little more detail on our all-in-sustaining costs. On Slide 25 in 2018, ASIC totaled $764 dollars per ounce sold for the year. For 2019, as Joe mentioned, we'll be ramping up to the 3800 ton a day level by year's end. Our total ASIC spending will be approximately $325 million to $341 million. With the increase in tons, there is a corresponding increase of approximately $15 million in spending over 2018. The main factors of the increase include additional mine development of $17 million reflecting the additional 300 meters per month as well as additional resource drilling of approximately $6 million over the 2018 levels. Within the $30 million estimate for sustaining capital, we had a number of one-time projects totaling $15 million. In addition to sustaining capital, we estimate spending $15 million on the 3800 a ton day mill expansion. With the increase in concentrate production, TCRCs will also increase by approximately 7 million. Therefore, the all-in-sustaining costs were range from $775 to $875 per ounce sold for the year. As we ramp up production through the year, we expect ASIC in the first quarter to be higher and ASIC in the fourth quarter to be lower than this range. For 2019, current gold prices we're able to self finance or ramp up to 3800 tons per day generate significant free cash flows and our targeting debt reduction of approximately $140 million to continue improving our balance sheet. Now back to you, Joe.

[Joseph Ovsenek:]

Thanks Tom. With our first full year production behind us, we're finalizing the data compilation and technical work to update the key benchmarks for the Brucejack mine. Early next quarter, we expect to disclose updated mineral resource and reserve estimates in an updated life of mine plan for the Valley of the Kings deposit followed by an updated technical report for the Brucejack mine. These updates will incorporate what we have learned mining and processing over 1.5 million of gold mineralization. These initial six quarters of production. We will host a technical session to coincide with these updates and in due course will advise of the date and time with a link to the live webcast. Before concluding, I would like to highlight the value proposition of the Brucejack mine. As it stands relative to peers, in terms of cost and profitability Here on Slide 28, we have plotted our 2018 Gold production versus our all-in-sustaining cost per ounce of gold sold as well as the same metrics for some well-established intermediate gold producing peers as you can see Pretium stacks up well with costs in the first quartile, even though we've only been in production a short while compared to our more established peers. In 2019, we will continue to focus on driving down costs and moving forward on gold production. On Slide 29, we plotted free cash flow to enterprise value against some of our peers, which highlights the near-term upside for Pretium. We have operated Brucejack profitability since the first quarter production in the third quarter of 2017 including the period of ramp up during a challenging gold price environment in 2018. We are now in a favorable gold price environment and as we deliver on production and cost guidance, we expect our shares to reflect that. Brucejack is now securely established as a profitable low cost middle tier gold producer located in Canada. We remain fully focused on consistent execution of Brucejack in order to deliver profitable gold production and meet or beat, our full year 2019 guidance. Thank you. That concludes the formal presentation. I will now turn the call over to the operator, who will open the lines for your questions. Operator?

[Operator:]

Thank you. [Operator Instructions] Our first question comes from Justin Chen of Numis Securities.

[Justin Chen:]

Good morning guys. Thanks very much for the call. My first question is just on your thoughts on grades through the year, by the sounds of it you expect cost to be lower later in the year. Does that imply a trend in grade or do you have any trends that you expect to see at this point?

[Joseph Ovsenek:]

Good morning, Justin. We would expect to see higher grade in tons at the end of the year than the beginning of the year.

[Justin Chen:]

Okay. Thanks. That's quite helpful. In terms of your stope inventory and where you are now and where you intend to be for 3800 tons a day. Can you just give us a sense of, I guess just that where you stand now and do you hope to get about 12 to 13 and when do you think you'll get there?

[Joseph Ovsenek:]

Well, look, we're going to be ramping up that's why we've increased our production rate underground, development rate underground at 1000 meters per month. So we'll be -- we are ramping that up as we speak. And we'll be giving more color on that in early April when we have our technical session.

[Justin Chen:]

Okay. Can I just press you for where you stand now in terms of your stopes?

[Joseph Ovsenek:]

Off the top of my head, I think we're at ten to twelve right now.

[Justin Chen:]

Okay.

[Joseph Ovsenek:]

But we're ramping that up. We want to get ahead of that and that's why we've increased our underground development.

[Justin Chen:]

Okay. Excellent. Thanks very much. I will let everyone else get their questions.

[Operator:]

Our next question comes from Ovais Habib of Scotiabank.

[Ovais Habib:]

Hey, good morning Joe.

[Joseph Ovsenek:]

Good morning, Ovais.

[Ovais Habib:]

Just a couple of questions on my end and just a follow up question from Justin, I believe, in regards to 2019 guidance, you basically said, okay throughput is going higher towards the second half of the year. And you said grades are also going higher in the second half of the year? Is that correct?

[Joseph Ovsenek:]

Yes. We would see grade and tons trending up as we go through the year.

[Ovais Habib:]

So basically, I mean in terms of production wise as well obviously first half is going to be weaker than the second half. But in terms of grade then, if your grade is about 10.4, then what kind of grade expectations do you have for the first half? Any comment on that Joe right now?

[Joseph Ovsenek:]

We'll be in -- it's an average rate for the year that we're giving. Okay. So we would expect to be stronger in the latter half and a bit lighter in the first half.

[Ovais Habib:]

Okay. And just in terms of the 10.4 grams per ton, are you looking in 2019 to mine outside the proven reserve area, or is it still within the reserves?

[Joseph Ovsenek:]

At this point in time we're pushing our development to get outside. That's one of the reasons for the increased production development rate. We need to get outside, we have geotechnical ventilation constraints, various constraints on our mining when we ramp up the 3800 per day. And so we need to open up the breadth of the mine, the east, west and the depth to actually sustainably pull 3800 tons per day. So we will be moving outside of that. Well, on the slides we've had over the past that box that we've been mining in.

[Ovais Habib:]

Right. Right. Okay. Okay. Thanks for that. And then just in terms of reconciliation. In the press release, I mean you guys are talking about the block model was predicting around 13.23 grams per ton. Now, was this provided, I mean is this, is it still this block model within the updated feasibility study that we were -- we had received I guess in 2016 or this was a new kind of mine plan that you guys were kind of predicting going into 2018?

[Joseph Ovsenek:]

Well, this is a mine plan…

[Ovais Habib:]

Number that's all.

[Joseph Ovsenek:]

Yes. Well, this is the mine plan we're using, right, feasibility study mine plans are concepts put forward before you actually get underground to start mining. So that was the mine plan we were executing on which is our actual mine plan. And if you look at the actual mine plan stope shapes what we mined and against what the model called for those that's where you get that grade from.

[Ovais Habib:]

Got it. Okay. Okay. I'll leave it at that and I will let some other people ask questions as well. Thanks.

[Joseph Ovsenek:]

Thanks Ovais.

[Operator:]

Our next question comes from Joseph Reagor of ROTH Capital Partners.

[Joseph Reagor:]

Good morning guys. Thanks for taking the questions. Just to follow up on the great reconciliation items. So how should we look at that 90% or 92% compared to what the reported reserves are for the company, like -- is that kind of a good guide of what you would expect as far as the revised reserve grades or is there a wider range to that expectation.

[Joseph Ovsenek:]

Good morning, Joe. All we can really say about the reconciliation is that that's what you have for the areas we mined in and it doesn't speak for areas beyond that. So we will be coming forward with some more information in April at our technical session. But, reconciliation really relates to the areas we have mined in and only those areas as you know it's very variable deposit.

[Joseph Reagor:]

Okay, fair enough. And then thinking about the 2019 guide and I think it, when we compare this to what you did last year, obviously, we're looking at that 10% decline in grade. Is that reflective in any way that you guys like based on the experience you had in the second half that you guys have taken a more conservative approach this year and realizing that the variability can cause a wider range of outcomes or is that based off the similar math of how you guys came up with the expectations for the second half of last year.

[Joseph Ovsenek:]

Good question, Joe. We believe we're being prudent with our guidance for 2019.

[Joseph Reagor:]

Okay. All right. I guess I'll turn it over. Thank you.

[Joseph Ovsenek:]

Thanks Joe.

[Operator:]

Our next question comes from Heiko Ihle of H.C. Wainwright.

[Heiko Ihle:]

Congrats. Can you hear me?

[Joseph Ovsenek:]

Yes. I can hear you. Good morning.

[Heiko Ihle:]

Sorry about that. I'm at an airport and there is a crazy amount of noise. We've given the permit per empty production. You said you started the year up at about 3000 tons per day ramping up to 3800 tons per day. It's Mississippi right now where were we - - on June 31, where do you think we'll be at the end of Feb and where do you think we'll be at the end of March, please?

[Joseph Ovsenek:]

Well, we're running north of 3000 tons per day right now. But we've got scheduled shutdowns and very -- we're doing some work in the middle that cut over to the bulk loading and flotation concentrate. So we're running at north of 3000 tons per day at the moment. But we do have some scheduled shutdowns in that over the quarter. So we'll see where we come out in the quarter.

[Heiko Ihle:]

Can you quantify that number just a little bit more exactly?

[Joseph Ovsenek:]

No, we are right. I think at the end of January remember we were running about 3300.

[Heiko Ihle:]

Okay, perfect. And you mentioned the targeted debt reduction, but you're using 1260.78 exchange rate. I mean let's say we stay at 1320 gold where does the excess money go? We are going to drill that into the ground. Are we going to pay back more debts?

[Joseph Ovsenek:]

It's a good question. Our focus isn't paying off debt. But I do throw in the caveat there. If work is successful and drilling at deep holes and hitting that pour free and we get some nice results we will want to follow up on that. So we have some flexibility there. But our primary focus over the next couple of years is going to be paying down debt and deciding whether we put in a dividend policy or shareholder buyback -- a share buyback. But, those are the primary use of the cash looking ahead.

[Heiko Ihle:]

Got it. Thank you guys so much. Again, apologies for the noise there in the background.

[Joseph Ovsenek:]

Yes. No problem. Came loud and clear.

[Operator:]

Our next question comes from Dan Rollins of RBC Capital Markets.

[Dan Rollins:]

Thanks very much. I know the focus is on grade, but I think the free cash flow potential is being missed by the market today as it was last year. But maybe just quickly on that just trying to tighten up the costs that we were modeling here. But could you sort of give us an idea of what you're modeling on a unit basis in Canadian dollars for mining, milling and G&A for this year? And then, maybe whatever direction you see once you've got the underground sort of that steady state 3800 ton a day?

[Joseph Ovsenek:]

Dan, Tom's going to kick in on that one.

[Tom Yip:]

Hi, Dan. What I can tell you is that in 2018, we're running approximately $210 per ounce, our preferred per ton in U.S. dollars and will be trending down because we have higher throughput. So we'll probably see a slightly less than about $200 per ton, if you want to split of where we're spending is primarily, mine is about 50%, processing and maintenance is about 20% and general services, which includes surface operations, roads what have you. That's sort of your 30%. So that is sort of roughly where we're at these days.

[Dan Rollins:]

Okay, perfect. And can you just update us based on what you're seeing right now, when do you expect one to start paying the BC mineral tax, and two, when you expect to be fully taxable on a corporate income tax level?

[Joseph Ovsenek:]

The BC mineral tax we are paying the low rate of 2%.

[Dan Rollins:]

Yes.

[Tom Yip:]

And now we've got a significant pool, so we'll be somewhere year as [EBL] [ph] 3 to 4 years at least before we see the higher number kick in. And in addition the federal and provisional rates will be out there on a cash basis also.

[Dan Rollins:]

Okay, perfect. And then, just on the targeted debt payment, I'm assuming that's going to be back end loaded with respect to both production and when the grades come up?

[Tom Yip:]

Yes. Well, there also mandatory quarterly payments that we have to make also.

[Joseph Ovsenek:]

Look we're generating cash through all quarters, which we'll be looking at that thing.

[Dan Rollins:]

Okay. That's great. Thanks very much. Appreciate the color.

[Operator:]

Our next question comes from Anita Soni of CIBC.

[Anita Soni:]

Good morning, Joe and team. My question is with regards to the grade profile. I would have thought that coming off of 11.5 gram per ton material that there would have sort of been in blend down as you go into the further zones that are -- as you mentioned were sort of constrained by rock mechanics and ventilation issues. So can you talk about what the rock mechanic or the geotechnical constraints are and the ventilation constraints so I can understand what's going on?

[Joseph Ovsenek:]

On the ventilation side, we can only operate so much equipment on any given level at any given time. And we also have drilling going on, so we were producing a lot of -- exhaust that at depth we're not electrical yet. And so we're working on that. We have our mind sequencing to worry about with geo technically, we can't be mining a couple of stopes close to each other. We're just paced in between that's not going to work. So we're working within constraints like that as we're trying to open up the ore body to the east and west and depth.

[Anita Soni:]

So I understand you actually have basically a 3500 or 3300 ton opened up right. But it's just a matter of being able to mind and mind these and fill the mill in sequence?

[Joseph Ovsenek:]

Yes. We're running at roughly that, but we want to get to the point where we're sustainable at that because at this point in time we are pushing a lot of stopes through and we'll see how that goes because we want to really get ahead because the last thing you want to do is, once you get behind underground you're in trouble. So we're trying to push what we can, but not push too hard while we open things up.

[Anita Soni:]

And then, I just wanted to follow-up. I think someone already asked the question in a different manner. But, the 10.4 gram per ton material does that incorporate any kind of conservatism given that your grade reconciliation update or is that based on the prior reserve estimate and what those areas would give you from a geological model perspective?

[Joseph Ovsenek:]

Well, we look through our model and we've got our mine plan for the year and we believe that guidance is prudent.

[Anita Soni:]

Okay. That's it for me. Thanks.

[Joseph Ovsenek:]

Thanks Anita.

[Operator:]

Our next question comes from Bhakti Pavani of Alliance Global Partners.

[Bhakti Pavani:]

Good morning, guys.

[Joseph Ovsenek:]

Good morning.

[Bhakti Pavani:]

Well, most of my questions have been asked. So, just kind of a housekeeping question on sustaining capital. You did mention there's going to be a one-time sustaining capital of 15 million. Just kind of wondering from the modeling perspective, how is that expenditure going to trend over the quarters? And going forward what would be the ideal go to model?

[Tom Yip:]

The spending profile of the sustaining capital is pretty much sort of midyear focus because we like to do our construction projects during the summer months. The reason why we identify these as one time is, we don't think that these will be crystal. If you assume that going forward, we wouldn't have these items anymore, our sustaining capital will be reduced accordingly.

[Bhakti Pavani:]

I believed once you are ramping up your underground development from 700 meters to 1000 meters, so -- and the increased production up to 3800 tons per day, I'm assuming that development rate would be required going forward?

[Joseph Ovsenek:]

We'll see how the development rate comes out. We're working through the mine plan right now. I would expect that as we get ahead and get built things built in that you should see the development rate fall off somewhat. And we'll have more information on that at the technical session in April.

[Bhakti Pavani:]

Okay, [indiscernible]. Thank you very much.

[Operator:]

Our next question comes from Mark Magarian of UBS Financial Services.

[Mark Magarian:]

Hey, Joe. How are you doing?

[Joseph Ovsenek:]

Great. How are you doing?

[Mark Magarian:]

I'm all right. A lot of questions have been answered, but I guess, is the market showing that there's obviously still a lot of uncertainty and it sounds like in April you're going to clean some of that op. But my key question here is, in '20 that you -- say in your presentation and you said earlier in the call that the 2019 gold grade is not representative of the life of mine grade. Can you give an indication even at this stage before the detailed one in April that statement implies that one should expect the life of mine grade to be higher than 10.4 or potentially lower?

[Joseph Ovsenek:]

Well, I can't really get into that Mark. We're working on the reserve update now and we will have it for -- the target is early second quarter and we're pushing hard on that. And we will provide -- we're going to open things up provide a lot of information on reserve, resource, geology, mining initiatives and all kinds of things come early April. So can't comment on it now, but we will provide a lot of commentary in a month and a half, two months.

[Mark Magarian:]

Okay. Has there been any requests for site visits in the last couple of months by any of the majors?

[Joseph Ovsenek:]

Sorry. We can't. We don't comment on possible M&A type activity.

[Mark Magarian:]

All right. Thank you.

[Joseph Ovsenek:]

Thank you.

[Operator:]

Our next question comes from Onno Rutten of Mackenzie Investments.

[Onno Rutten:]

Yes. Good morning everyone. Good morning Joe.

[Joseph Ovsenek:]

Good morning, Onno.

[Onno Rutten:]

The press release talks about a 2018 planned grade of 13.2 grams and 999,000 tons. Could you tell me what the reserve in depth envelope was predicting? The December 2016 reserve block model, will those stopes into that block model, what was the predicted tonnage and grade based on the 2016 reserve?

[Joseph Ovsenek:]

What I have. Well, what we have is what those stope shapes that came out with, right, against the model that we know cut the model into those stope shapes. I don't have -- I can't give you, I'll have it for you come April or sooner. What the Reserve called for the stopes design, right. So we're giving reconciliation against what was actually extracted based on CMS scans. And so I don't have the stope shape defined into that.

[Onno Rutten:]

But just to be clear the 999,000 tons at 13.2 grams were based on a certain mine model. As you stated earlier in response to the same question, you said that's an operational mine model. But that is not the reserve model just to be clear.

[Joseph Ovsenek:]

That's a 2016 model, right. That we updated from [indiscernible] and feasibility study.

[Onno Rutten:]

Reserve -you have a proven and probable reserve that's what you need to reconcile to, reconciliation data in your press release is not of any use to us.

[Joseph Ovsenek:]

Our reserve reconciliation was pretty much bang on with our resource reconciliation.

[Onno Rutten:]

Sorry. Can you elaborate?

[Joseph Ovsenek:]

If we look at numbers that, I don't have the exact number of the reserve reconciliation, we ran it both ways. The global resource model is what we work against coming out of 2016, but we ran it against the reserve as well as the resource and the numbers were pretty much bang on.

[Onno Rutten:]

So you suggest to me that the reserve model was for this area of mining was suggesting 1 million ton at 13.2 grams?

[Joseph Ovsenek:]

Pretty much. Exactly. If we had -- had not had that, if we had better reconciliation, we will achieve guidance

[Onno Rutten:]

Yes. But guidance was based on your operational mine model not the original 2016 reserve model?

[Joseph Ovsenek:]

Coming into the year it was based on the 2016 global resource model because we didn't get the great control model up and running till later of the year.

[Onno Rutten:]

Joe, the resource model is not of use to me. [Technical Difficulty] we mine two reserves, we don't mine two resources.

[Joseph Ovsenek:]

Correct. But what I'm saying is, it was based on our 2016 global work. So we had our 2016 resource model, our reserve model was based on that which we then provided guidance on. And then as we developed through the year, we refined a grade control model that we operate on today on a short-term basis.

[Onno Rutten:]

But, the 13.2, 1 million tons is based on the short range mine model?

[Joseph Ovsenek:]

No. Because it was based on the overall reserve model coming into the year.

[Onno Rutten:]

And the fact that the actual published proven reserve was 14.5 grams and the probable 16.5?

[Joseph Ovsenek:]

16.6, I believe, correct.

[Onno Rutten:]

But still, I'm trying to understand the 13.2.

[Joseph Ovsenek:]

Those were the stope shapes we mined during this year. Remember it's not a consistent grades wrote that area we're mining. So it's a very variable grade. And so taking the stopes that were available for us to mine on the various levels subject to all the constraints we operate at any given time. Those were the stopes that were available and that was the grade given to those stopes by the reserve model as well as resource model.

[Onno Rutten:]

Okay. Thank you.

[Joseph Ovsenek:]

Thanks Onno.

[Operator:]

Our next question comes from Steve Emerson of Emerson Investment Group.

[Steve Emerson:]

Not to beat a dead horse, but on the grade, can you put a range, I know you're trying to be meat and beat guidance, but would you care to put a range around that 10.4 and does that incorporate possible improvement and what improvement might be reasonable for the longitudinal mining trial?

[Joseph Ovsenek:]

Good questions, Steve. So that's an average grade for the year. So we're going to be both up and down on that lower early on, higher later on. I can't really give you a range. But, that longitudinal mining that is very important thing we're looking at, long-hole stoping we are going to present on that in -- when we have our technical session in April and look at the initiatives as we kick off. We're going to be running a few test stopes longitudinally this quarter. We're opening up part of the deposit or longitudinal long-hole stoping and so we will provide more information on that, how the geology looks as well as how the reserves are looking and how that all fits together with longitudinal mining come April. So we have a lot of information we want to talk about then. That will be a good part of it. And I think that's a big part of the future of the mine.

[Steve Emerson:]

Okay. And I would assume that your grade forecast does not include application of longitudinal mining?

[Joseph Ovsenek:]

You're correct. That is simply based on the existing mine plan with transfers loanable stoping. So none of the benefits from longitudinal mining are worked into it.

[Steve Emerson:]

And what grade first half is reasonable versus second half. You said it would be lower in the first half?

[Joseph Ovsenek:]

I can't really comment on that Steve. But it would be lower and higher in the second.

[Steve Emerson:]

Great. Looking forward to seeing you in May. Thank you.

[Joseph Ovsenek:]

Thank you.

[Operator:]

Thank you. This concludes the question-and-answer session. I would like to turn the conference back over to Mr. Ovsenek for any closing remarks.

[Joseph Ovsenek:]

Thank you, everyone for dialing in to our earnings call this morning. We appreciate all the comments and questions. Have a good weekend everyone. Bye-bye.

[Operator:]

Thank you for dialing. This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.