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Edited Transcript of ROXG earnings conference call or presentation 16-May-18 3:00pm GMT

Q1 2018 Roxgold Inc Earnings Call

VANCOUVER May 24, 2018 (Thomson StreetEvents) -- Edited Transcript of Roxgold Inc earnings conference call or presentation Wednesday, May 16, 2018 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* John Andrew Dorward

Roxgold Inc. - President, CEO & Director

* Kelley Stamm

Dominion Diamond Corporation - Manager of IR

* Natacha Garoute

Roxgold Inc. - CFO & Corporate Secretary

* Paul Criddle

Roxgold Inc. - COO

* Yan Bourassa

Roxgold Inc. - VP of Geology

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Conference Call Participants

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* Dan Rollins

RBC Capital Markets, LLC, Research Division - Head of Global Mining Research and Analyst

* Michael J. Gray

Macquarie Research - Gold Analyst

* Rahul Thomas Paul

Canaccord Genuity Limited, Research Division - Director

* Ryan Walker

Echelon Wealth Partners Inc., Research Division - Metals and Mining Analyst

* Tyron Breytenbach

Cormark Securities Inc., Research Division - Director of Institutional Equity Research

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen, and welcome to Roxgold's 2018 First Quarter Earnings Result Conference Call. My name is Chantelle, and I will be your conference operator for today's call. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes. I will now turn the call over to Kelley Stamm, Manager, Investor Relations. Please go ahead.

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Kelley Stamm, Dominion Diamond Corporation - Manager of IR [2]

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Thank you, operator. Good morning, everyone, and welcome to Roxgold's 2018 First Quarter Results Conference Call.

Please note that certain statements on today's call may contain forward-looking information subject to known and unknown risks, uncertainties and other factors. For more information, we refer you to our detailed cautionary note within last night's press release.

Please note that all amounts are in U.S. dollars, unless otherwise noted.

With us today, we have John Dorward, President and CEO; Natacha Garoute, Chief Financial Officer; Paul Criddle, Chief Operating Officer; Yan Bourassa, Vice President, Geology; and Eric Pick, Vice President, Corporate Development, all of whom will be available for questions following the call.

I will now turn the call over to John.

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John Andrew Dorward, Roxgold Inc. - President, CEO & Director [3]

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Good morning, and thank you for joining us today, which I note is the 2-year anniversary of the first gold pour at Yaramoko.

Before I begin discussing our excellent first quarter results, I would like to address our announcement regarding Paul Criddle, who will be stepping down from his position as Chief Operating Officer effective July 1 to pursue new opportunities in Australia but who will remain with Roxgold through his nomination to the Board of Directors. I would like to take this opportunity to thank Paul for all his efforts in bringing Yaramoko mine from its early development stage to where we stand today with all our strong performance results. I think what passes for spring in Toronto might have been the final straw, and Paul is seeking warmer climes in Perth. And we wish him all the best, and I look forward to welcoming him to the board next month.

With regard to the transition, we are extremely pleased to announce that Iain Cox, who is Roxgold's General Manager, Operations, will be assuming the role of Interim Chief Operating Officer following Paul's departure. Iain is based at the mine site and has been with Roxgold since 2014 where he has lead the on-site team in all aspects of the company's successful transition from development to production. Iain is a mining engineer with over 25 years of international experience in developing and operating underground mines, particularly in West Africa and has held senior leadership roles at Newmont/Normandy, Centamin and Crew Gold. Through Iain's wealth of experience, technical expertise and considerable knowledge of Yaramoko, I am confident of a seamless transition and that he will continue our strong and consistent operational performance and maintain our excellent safety record.

Turning now to our safety performance, and as a testament to Iaian's leadership, we are currently at more than 4.5 million hours lost time, injury-free since the mine's commissioning. Health and safety is a constant priority of Roxgold, and we are always looking for ways to encourage improvement in performance.

Last quarter, I mentioned the implementation of health and safety training programs for all employees as part of the evolving nature of our safety program. As such, a reward and recognition program was introduced at the site at the end of 2017 to encourage both individual and group participation in the health and safety performance improvement efforts and to support the growing safety culture at Roxgold. In March, the program presented its first award to the Roxgold projects team. During the quarter, the company's annual refresher induction session was completed, along with 4,000 hours of training.

2018 has started off ahead of our expectations, with Yaramoko continuing to significantly outperform, which has allowed us to increase our guidance for the second year running. The first quarter saw a record quarterly gold production of 40,452 ounces, achieved from a record quarterly mill throughput of 71,576 tonnes at an average head grade of 16.8 grams per tonne.

Cash operating costs were extremely low at $391 per ounce and an all-in sustaining cost of $658 per ounce sold, which generated cash flow from mining operations of $30.9 million or cash flow per share of USD 0.08 or CAD 0.11.

During the quarter, 88,607 tonnes were mined, of which approximately 75% of ore mined came from stoping activities. Six open stopes were available at the end of the quarter, and average head grade was 16.8 grams per tonne. And mill operating time was at 97%.

We have continued to invest in underground development where we have approximately 18 months of development, which provides flexibility in mine operations, thereby derisking the operation. In addition, our previous strong production results from the mine has built a stockpile equivalent to approximately 2 months of production.

Reconciliation of mined material against the company's resource model continued to improve in the first quarter, following the good reconciliation observed in the last quarter of 2017. Reconciliation performed well on both a tonnage and grade basis, with gold production reconciling within 4% of the resource model.

As mentioned, the first quarter saw record tonnes processed, 71,576 tonnes, an increase of 761 tonnes from the previous quarter's record and 12% higher compared to Q1 2017. This steady increase quarter-over-quarter is a result of the ongoing optimization efforts at the processing plant.

We also continue to see the processing facility report excellent gold recoveries at nearly 99% for the quarter.

Cost for the quarter came in very low, with cash operating cost at $381 per ounce produced and all-in sustaining cost was $658 per ounce sold.

EBITDA was $28.8 million and a 54% EBITDA margin was achieved, resulting in strong cash flow for mining operations of $30.9 million or USD 0.08, CAD 0.11 per share for the quarter, which was up 30% from Q1 2017.

Adjusted earnings for the first quarter were USD 0.04 or CAD 0.05 per share.

As a result of this quarter's strong performance, return on equity was a class leading 25% over the last 12 months.

Due to our strong cash flow generation for the quarter, we have increased our cash position by 15% or approximately $9 million during the first quarter to $72.2 million. Subsequent to the quarter end, in April, the company received a reimbursement of $4.5 million of VAT from the government of Burkina Faso. With our cash position continuing to build, we are able to self-fund our Bagassi South expansion project of approximately $30 million through existing cash and future cash flows, while at the same time, reducing our debt.

Long-term debt at the end of quarter was $45 million following a $1.8 million repayment during the quarter.

Cash flow from Yaramoko has reduced the original project finance debt from $75 million at the beginning of 2017 to $45 million today.

Earlier this month, we announced implementation of a share buyback program of up to 10 million shares to return further value to our shareholders. This decision was based on our belief that the market price of Roxgold's common shares do not reflect the underlying value of the shares, given the company's excellent operational track record, strong balance sheet and near-term organically funded growth.

Turning now to the Bagassi South expansion. Construction activities at our second high-grade underground mine are tracking to plan. The box cut construction for the underground portal has progressed toward the second bench level as illustrated in the photos on the left of this slide. The haulage road construction is also nearing completion, with approximately 90% of the road in place as expected. We expect most of the surface infrastructure to be completed by the end of Q2, with underground development starting in the third quarter to be ready to receive the first ore as expected in the fourth quarter.

Process plant expansion is also progressing on schedule and on budget. Engineering, design and procurement activities for the plant expansion are well advanced with the structural and civil and mechanical scopes nearing completion. As mentioned last quarter, the second recrusher is currently being manufactured and is expected to be delivered to site in October. Processing plant tie-ins are expected to occur largely during planned maintenance stoppages in the third and fourth quarters.

All in all, the expansion associated with Bagassi South is tracking extremely well against expectations.

We continue to focus on our regional exploration program, where we have planned a 64,000-meter drilling program targeting regional anomalies, such as the Boni Shear, Haho, Kaho and Houko. Planning for the Haho Phase 1 drilling program totals 8,400 meters, consisting of 74 holes testing 4 distinct anomalies within the Yaramoko granite. As for the Boni Shear structure program, drill planning for the southern and central portion of the structure consists of a total of 66 drill holes, amounting to approximately 6,600 meters. Both programs are expected to be completed later in the second quarter, with results to follow shortly thereafter.

Given our record first quarter results, we are pleased to report that we have increased our full year production guidance to between the range of 120,000 and 130,000 ounces and have reduced production cost guidance.

Cash operating costs are expected to be within the range of $450 and $475 per ounce and all-in sustaining costs to be within the range of $740 and $790 per ounce for 2018.

In summary, Roxgold is continuing to deliver on its promise of returning shareholder value, demonstrated by robust operating results and expansion plans in place that add accretive and non-dilutive value. We are focused on a continuing strong cash flow generation at the 55 Zone; adding ounces to the production profile through the completion of the Bagassi South expansion; expanding the process plant to increase throughput by nearly 50%; pursuing organic growth through our extensive regional exploration program; and strengthening our balance sheet by growing net cash and continuing to pay down debt.

Thank you for your time this morning, and we would now like to welcome any questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from Rahul Paul with Canaccord Genuity.

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Rahul Thomas Paul, Canaccord Genuity Limited, Research Division - Director [2]

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You've continued to outperform on both production and cost. From a cost standpoint, could you tell me what mining and processing cost per tonne were? And how do they compare with what you had budgeted?

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John Andrew Dorward, Roxgold Inc. - President, CEO & Director [3]

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Thanks, Rahul. Thanks for the question. The -- I'm just grabbing my notes -- is it the per tonne?

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Natacha Garoute, Roxgold Inc. - CFO & Corporate Secretary [4]

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Yes.

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John Andrew Dorward, Roxgold Inc. - President, CEO & Director [5]

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Yes. So mining cost per tonne were $127, processing was $39. We had an inventory adjustment of $17, and G&A at the site was $31 for cash operating cost per tonne of $215.

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Rahul Thomas Paul, Canaccord Genuity Limited, Research Division - Director [6]

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Fair enough. And is that -- are you seeing better-than-expected costs on both mining and processing, John?

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John Andrew Dorward, Roxgold Inc. - President, CEO & Director [7]

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Look, I think we're seeing a bit of a benefit from the improved productivity than what we assume. So the mine is certainly being -- having some -- is more productive than what we assumed, I think, in the Feasibility Study, I think that's fair to say. And we've certainly seen that pickup in the -- with the ramp-up in stoping versus development or -- and that's -- as we sort of anticipated, that's certainly come to pass. I think on the processing side, we are seeing some slight improvements there as well, mainly because we're just putting more tonnes through. I mean, we are having some very good days in the mine -- in the mill and, basically, we don't -- very rare that it has a poor day. For example, I've seen recent days going through the mill at over 900 tonnes so -- which is very encouraging, given that the mine is also more productive. So all in all, it's really a productivity-driven story. This quarter, we had -- the mill -- significant item was a mill reline, and we also had some FX adjustments with the U.S. dollar versus the euro moving against us. But all in all, I think the costs are tracking very nicely, largely as a result of improved productivity.

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Rahul Thomas Paul, Canaccord Genuity Limited, Research Division - Director [8]

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Okay. And then just to follow up on that, my next question. So AUMS, the mining contract has done a really good job. But how much of your mining costs are fixed? So -- when Bagassi South comes online, the plant is expanded, you're mining more tonnes. To what extent would you expect mining cost per tonne to go down?

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John Andrew Dorward, Roxgold Inc. - President, CEO & Director [9]

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A very topical question. We are sort of working quite extensively with AUMS. I mean, we've given -- we have a contract that's been running now for nearly 3 years with the initial startup at Yaramoko. And we have gone back and sat down with AUMS to talk about what does Bagassi South bring me. So we've initiated the early works at Bagassi South, the pioneering works, if you will, under the existing contracts. But we are sitting down, looking at potentially a possible extension of that contract in concert with the right production. And it's -- I don't want to sort of preempt the results of that, but I think, I hope in future calls we'll be able to report back on a favorable outcome. That's certainly my hope, I think that's the trend -- the direction which we're trending in. But I might keep my powder dry until we have some paper inked on that topic.

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Rahul Thomas Paul, Canaccord Genuity Limited, Research Division - Director [10]

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Fair enough. Thanks, John, and all the best, Paul.

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Paul Criddle, Roxgold Inc. - COO [11]

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Thanks, Rahul.

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Operator [12]

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(Operator Instructions) Your next question comes from Michael Gray with Macquarie.

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Michael J. Gray, Macquarie Research - Gold Analyst [13]

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Great to see increase in production guidance, lower costs, and before I forget, all the best to you, Paul, as you move to the board. First of all, John, you mentioned 2 months of production in stockpiles. What's the grade of the stockpiles?

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John Andrew Dorward, Roxgold Inc. - President, CEO & Director [14]

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So off the top of my head, between 13 and 14 grams, upside 13. 13.5, I think, was the last number I saw.

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Paul Criddle, Roxgold Inc. - COO [15]

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13.8.

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Michael J. Gray, Macquarie Research - Gold Analyst [16]

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13.8, okay. Are you being impacted by higher fuel prices at all?

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John Andrew Dorward, Roxgold Inc. - President, CEO & Director [17]

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No, we haven't really seen that to date. The fixed -- the fuel price in Burkina is fixed by decree through the central government process. It is -- there's definitely a lag, I mean, there's obviously a link to world process, as you would imagine, and there's a lag between the flow. I -- We think if I was crystal gold gazing, that I would anticipate that potential increases might flow a little faster than potential decreases, but that could be the cynic in me. So I would think that there might be a bit of pressure on that as we go forward. I mean, having said that, we are probably the -- probably one of the least exposed mining companies to diesel fuel prices, given that we have the majority of our power requirements from the grid, which we think is very (inaudible), and we have only a small underground fleet. So -- but I do anticipate we might see something creeping. But I think the production that we're seeing -- the better production numbers that we're seeing give us a little bit of flexibility against that.

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Michael J. Gray, Macquarie Research - Gold Analyst [18]

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Do you expect cost to trend below $200 per tonne for the rest of the year?

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John Andrew Dorward, Roxgold Inc. - President, CEO & Director [19]

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No, I don't think so. I think we'll probably see -- these sort of costs, I think, are pretty indicative of what we expect for the balance of the year.

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Michael J. Gray, Macquarie Research - Gold Analyst [20]

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Okay. Okay, fair enough. You touched on, like, Q1 reconciliation being possible 4%. How's the grade reconciling to block model so far in Q2?

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John Andrew Dorward, Roxgold Inc. - President, CEO & Director [21]

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Probably pretty too early to tell, I think. I think we've seen, possibly, in some of the development areas, the grade might be a little bit better than what we have in the block model, but I think it's going to be pretty close. I think what we'll see, again, is a pretty close match in Q2 going forward. I wouldn't extrapolate what we've seen today, so we go back at the end of quarter and do it all as a -- with a bit more science.

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Michael J. Gray, Macquarie Research - Gold Analyst [22]

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Okay, fair enough. And finally, what can you say about the ongoing regional exploration and timing of the next news release update?

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Yan Bourassa, Roxgold Inc. - VP of Geology [23]

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Michael, thanks for the question. We're -- like John mentioned a bit earlier, we're just wrapping up the first phase of the regional program. So still -- some samples still at the lab, received that sort of review, the QA/QC. So we'll put a news release before the end of the second quarter, I would say. And that will include the regional drilling, a bit more drilling than we've been doing at Bagassi South and sort of the next phase under regional, sort of the new target that we're looking at to go and drill in Q3.

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Michael J. Gray, Macquarie Research - Gold Analyst [24]

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Okay, fair enough. Any revelations in terms of interpretation and thinking on the architecture of the belt so far? Or is that to be determined?

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Yan Bourassa, Roxgold Inc. - VP of Geology [25]

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In large part, still to be determined. I mean, like, we've hit the structures where we wanted. The structure is mineralized. We haven't had, like, the largest hit that we would hope for a large discovery, I think we're going to put that news out. But still a lot of work to be done and lots of structures that been interested in drilling, and we still have a lot of target that remain untested.

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John Andrew Dorward, Roxgold Inc. - President, CEO & Director [26]

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And also, we have a very -- a new senior structural geologist. We started now on a roster, and I think we're going through some of his sort of first initial thoughts and findings earlier, and I think that's -- it's definitely a new set of eyes. It's giving us some new ideas as well, which is quite exciting, too.

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Operator [27]

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

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Dan Rollins, RBC Capital Markets, LLC, Research Division - Head of Global Mining Research and Analyst [28]

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Congrats on the free cash flow, it's really nice to see. I was wondering if you might be able to just discuss the ability to maybe reduce the debt quicker than currently scheduled. You are sitting on a pretty well boatload of cash, paying interest on that debt. Even with the negative working capital [draw], you still [kind of ran] a lot of free cash flow. What's the situation there? Can you accelerate the debt payments? Or are they fixed? And if you can accelerate, is there cost to doing that?

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John Andrew Dorward, Roxgold Inc. - President, CEO & Director [29]

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No, so we -- it's a very flexible facility now. So with the restructuring and the early repayment we did last year, that sort of freed that up a lot. So the simple answer is we can repay that as and when we feel -- as and when we like with no penalty. So basically, we just give the banks notice that we'd like to repay at the end of the roll period, and we can repay it, and there's no additional fees or anything like that. I think, from a strategic perspective, we've maintained that debt, and we're repaying it in accordance with its sort of predetermined amortization schedule. And that's what the $1.8 million that we repaid during Q1 was. And I think, off the top of my head, with total repayments for 2018 are $8.4 million. So the debt's down below $40 million at the end of this year. And look -- I mean -- I think, absence us having a broad idea about something or finding a new deposit and needing to build another processing facility or something, which I am always hopeful of, I think we might look at repaying some of that debt. I mean, it's about -- it's -- as far as mining debt facilities go, it's very much at the lower end of that spectrum. It's LIBOR plus 3...

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Natacha Garoute, Roxgold Inc. - CFO & Corporate Secretary [30]

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7-5.

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John Andrew Dorward, Roxgold Inc. - President, CEO & Director [31]

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375. So it's pretty low, but it's 4.5%, 5% on $45 million is still a decent amount of money. So that is something that we would definitely look at. I think it's probably something to revisit later in the year and for next year. But I wouldn't be surprised if we start chomping into that date a bit faster.

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Dan Rollins, RBC Capital Markets, LLC, Research Division - Head of Global Mining Research and Analyst [32]

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Yes, perfect. I realize you have Bagassi coming on, and you always want to have some cash available to take advantage of opportunity. With the NCIB, when do you come out of blackout? And [when can you start to put some of that money] to work and buy back the shares?

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John Andrew Dorward, Roxgold Inc. - President, CEO & Director [33]

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So we have 2 days after the dissemination of our financials. So I guess, we have at the end of the week, next week.

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Operator [34]

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Your next question comes from the line of Tyron Breytenbach with Cormark Securities.

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Tyron Breytenbach, Cormark Securities Inc., Research Division - Director of Institutional Equity Research [35]

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Not often you see a return on equity metric for a junior gold mining company so definitely commend you there. And then, with Paul's ascension to the board, really comforting from our point of view that he's going to be there to kind of continue to mentor the team. But my question here, it's just on the CapEx at Bagassi South. So total CapEx there is around $30 million. I'm looking at the photos on the presentation, it looks like you're really getting stuck into it with that box cut and the tailings. But I think capital for Bagassi was only around $3 million this quarter. So just curious what that spend looks like for the rest of the build? And whether we'll see kind of a lag where you're still paying off contractors once first ore has been put through the mill in Q4?

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John Andrew Dorward, Roxgold Inc. - President, CEO & Director [36]

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Yes. Look, I think, we'll have a fairly typical S-curve. We're ramping up this quarter and Q3 and Q4 are the biggest payments, and then there will be some working capital payables that's [trained] to the first part of 2019. Do you have the expectations, Natacha, what we're thinking about this quarter and the next?

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Natacha Garoute, Roxgold Inc. - CFO & Corporate Secretary [37]

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Yes, so, like, for Q2 and Q3, it's about, like, roughly $8 million, $9 million each, then we have, like, a big portion in Q4. And I expect that we're only going to have, like, some remaining payables of, like, $2 million at the end of December.

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Tyron Breytenbach, Cormark Securities Inc., Research Division - Director of Institutional Equity Research [38]

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Okay, that's super helpful. And then just to follow on Rahul's question. Obviously, as you mobilize that at Bagassi, maybe you can bring the contract mining cost down. But what about the processing cost? Once you've expanded that mill, there should be some economies of scale there. Do you think we can see maybe a small reduction in those unit processing costs as well?

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John Andrew Dorward, Roxgold Inc. - President, CEO & Director [39]

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Yes, I think that's not an unreasonable expectation. Off the top of my head, I can't quite recall. I mean, the last time, we put -- when we put the technical report out, we sort of split Bagassi South out as its sort of own project, and we did see some of the benefits, the synergies of the additional tonnes there. But I think we definitely see some -- expecting the range of maybe 10-ish percent or thereabouts, so I think it's a pretty good target for us.

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Operator [40]

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Your next question comes from the line of Ryan Walker with Echelon Wealth Partners.

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Ryan Walker, Echelon Wealth Partners Inc., Research Division - Metals and Mining Analyst [41]

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Congratulations on a great quarter, and Paul, congratulations as well. Just wondering if we could talk about -- so the Bagassi expansion, timing of any component of the expansion that might impact throughput in the mill?

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John Andrew Dorward, Roxgold Inc. - President, CEO & Director [42]

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Sure. There's really -- I guess, there's 2 components that are being addressed by and large by the expansion, and first is the crushing capacity. So we put a second recrusher in, and I think, on our presentation, you can see the -- where that -- the ghost of that been put in terms of the schematic. So what that enables us to do is take the crush size down. So what the feed -- the feeding through the SAG mill is reduced, and the SAG mill is able to then run -- we can put more tonnes through the SAG as the load on the SAG mill is reduced to the smaller fleet to us. So that's first off. And then the second is really upgrading around the tails -- the tailings [lawn], the pumping and the lawn capacity there. And that's basically either of those -- that basically, once we have that done, we'll have additional milling capacity anyway, just off our current setup. So I think I have to be careful what I say because Paul's going to be my boss soon, so I don't want to make too many promises for him. But I think we see that as the main potential for an early win, is to get that data private and then we can stop jamming if we can put some more tonne through. The crusher itself is due on-site. I think, as we mentioned in October, we're anticipating a fairly straightforward time for that, but that's -- I think the tailings infrastructure upgrade is a key one that might be something that's not a bit earlier, but I won't guarantee it just yet. I think, Paul, anything else (inaudible)

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Paul Criddle, Roxgold Inc. - COO [43]

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A bit further that -- now that I think, and both the tailings install and the crushing install are both very simple turnkey off-the-shelf packages. So I think the installation process for those will be pretty straightforward. As you can see in the photos, the tailing perhaps will be done well in advance of the equipment arriving on-site. And as noted in the call, I think those tailings will be within already planned shutdowns. So we have every opportunity for those to impact throughput on 55 Zone material in isolation before Bagassi South starts to hit the wrong [pattern] in big volumes. So look, we're pretty focused on that because that's an easy win.

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John Andrew Dorward, Roxgold Inc. - President, CEO & Director [44]

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Thanks, Ryan. And I'm hoping Paul remembers that I was paying attention when he's in the camera session at his first board meetings so -- and report to the other directors.

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Operator [45]

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There are no further questions at this time. I will now turn the call back over to John.

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John Andrew Dorward, Roxgold Inc. - President, CEO & Director [46]

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Thank you very much. I'd like to thank everybody for joining the call today. If anyone has any follow-up questions, that we can address them through myself or get in touch with Kelly. And we look forward to speaking to you again when we report our fiscal 2018 second quarter results. Have a good day. Thanks.

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Operator [47]

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