Question-and-Answer Session

Operator

(Operator Instructions). And the first question is from Kevin Chiew from CIBC. Please go ahead.

Kevin Chiew - CIBC

My first question is what’s the carrying value that you’ve for the Timmins unit?

Meri Verli

Right now it's 500, right about $500 million.

Kevin Chiew - CIBC

Okay so turning to your reserves, you know you have kind of split out the reduction in ounces between mine production, the lower gold price and result of definition drilling. Just wondering how much of that reduction in ounces is actually attributable to that definition drilling?
Tony Makuch

We haven't really, can’t necessarily quantify like that but I mean I would suppose the reduction in ounces as we have drilled and come up with lower grades in certain areas and then apply the lower grades what we assume to interpret now it's definitely with the lower gold prices sometimes become uneconomic or appear to be uneconomic at this time and/or based on the drilling and again the lower gold prices and then looking at where they are located we actually might sit there and say okay maybe we’re not going to mine them at this point in time. So we moved them from our resource and our reserves.

Kevin Chiew - CIBC

And then just looking at your gold price assumption of 1100, it seems to be quite low compared to what we have kind of seen with some of your peers. What’s the thinking behind that, is that just conservatism on your part or what’s the thinking there?
Tony Makuch

I mean I think it was again if you look at what we have been working out over the last few years and learning from the past, we are trying to apply conservatism, trying to apply, look at all the risk we have in our operations and in terms of get reliable, sustainable production to the mill and by applying a lower gold price and then ensuring that with the economics and the great reliability, production reliability fits within that we feel we have a chance of being more successful going into the future and it provides us with some flexibility for upside should things improve.

Kevin Chiew - CIBC

I’m sure you’ve done some sensitivities on the calculation, what happens if you use or assume a $1300 an ounce gold price?
Tony Makuch

Well again we haven't done -- we don’t have the working necessary done and there is just lot of moving parts but definitely if we use a higher gold price we do add to our resource reserve base, definitely. But I should reiterate some of the ounces especially the ounce we mined, some of the ounces are depleting.

Kevin Chiew - CIBC

Okay and just in terms of some of the areas that you’re looking to expand the resources and reserves, could you maybe provide a little bit more color there in terms of how close are these areas and what sort of additional CapEx if you start that far ahead, would you be looking at adding these ounces?

Tony Makuch

So all the work is done in the mine workings, so some of the areas are like 100 meters away from some exiting (indiscernible), exiting development, Timmins mine, some are a little bit further away but all on the structure at Timmins mine similarly at Bell Creek we’re drilling within the area where we’re mine, looking for parallel structures and some work extensions to depth. I will let Eric give a little more color to that.
Eric Kallio

 

I think as Tony had mentioned that we have range of targets, we have four main targets and with variable types of risk I would say and upsides related to them. I mean we have some that have grade [ph] close to mining and are just off the edges of zones that we’re mining. And other ones that are little bit more conceptual but I think that main targets we outlined in the presentation, one of the main one would be the down plunge of the Footwall zone where we have been having a lot of success with mining now on the 790 and 770 level. We see the drilling be very sparse down the depths in that area. So we see potential to add ounces there.

We’re also looking at a new full nodes which is direct east of the mine so with the more detailed geology [ph] we recognize the potential there. The main benefit of that we see is possibility for little bit higher grades ore at higher elevation. So it's not totally about quantity but we also see areas to the east that also have been tested and then the third main targets that we have outlined in the presentation and this is an area which is between Thunder Creek and Timmins Mine and this is approximately a 2 kilometer straight length which has never been drilled below both the 650 meter level and we will be looking for targets similar to the Timmins mine structure or to another in true of something like Thunder Creek.

I mean it is an area we know nothing about but I mean it's in a highly prospective area and we have really good model for what we’re looking for.
ony Makuch

Yes so that area -- the structure between Timmins mine and Thunder Creek that holds both those deposits it's not been explored. We’re not going beyond Thunder Creek, we’re exploring within again on mine workings but between Timmins mine, Thunder Creek. One of the thing we’re also are doing, we have some other projects or some other reserves within our existing, within Bell Creek or Timmins West that we’re actually also evaluating -- one area say might be (indiscernible) we have some other projects that we can move up the food chain pretty quickly in terms of what we have.

Kevin Chiew - CIBC

So relatively nearby?

Tony Makuch

Yes, near mine, within basically either in mine or everything is within a kilometer of our mine or our mill.

Kevin Chiew - CIBC

And just one final question for me, with respect to your 2014 guidance, I might have missed this but what’s the exchange rate that you’ve assumed for the cost there?
Tony Makuch

2014 guidance?

Kevin Chiew - CIBC

Yes.

Tony Makuch

We used $0.975.

Operator

Thank you. The next question is from Stephen Walker from RBC Capital Markets. Please go ahead.
Stephen Walker - RBC Capital Markets

 

Tony just a couple of questions on the reserves and resources, the guidance for 2014 is 4.5 grams to 5 grams, your reserve grade is 4.6 grams that’s suggesting future years we’re going to see potential for a sharp decline in the grades going forward. And I know you’re going to be delivering the technical study here at the end of the month but can you give us some guidance and I apologize if it was included I was cut off for a bid. Could you give us some guidance on the grades going out over the next five years how you expect those to decline around the average 4.6 grams that you’ve given?

Tony Makuch

Well what we see, I mean we have tried to apply little bit of conservatism to our grades but I would say that over the next five years as we show between 4.5 and 5 grams is what we expect to see. So we’re going to see slightly higher grades this year, sometimes in the following years but the range should be everything within those levels over the next five years or they are within those levels.

There is no really any particular year where we’re mining significantly time above our reserve grades.

Eric Kallio

I can help maybe to that too. I agree with Tony I think that this year we saw a bit of decline but we know the decline in grade is related to some specific areas and not to get into too much detail but the reserve is Thunder Creek with one area where we did not have success with in field drilling. We saw a mixture of lower and higher (indiscernible). So that’s what led to some gold [ph] coming out. Also the upper part of the Timmins mine we had a lot of drilling programs in early like throughout the year there and it's an area that we’re not really focusing on from mine but we did see declines there too.

Stephen Walker - RBC Capital Markets

But on the opposite side things like the Rusk zone and Timmins, on the Timmins deposited at depth is equal or better than.

Eric Kallio

That’s right and the areas that are in close proximity to what we’re planning to mine.
Tony Makuch

And we increased our head grade at Bell Creek.

Stephen Walker - RBC Capital Markets

But just a question on the resources, are there solution factors factored into the calculation of the resources that you would provide Timmins and Bell Creek and are they the same as the dilution factors for the reserve calculations?

Eric Kallio

Well the way that we handle that is that actually yes there is dilution incorporated to the reserves but it's definitely for reserves [ph]. What we do outline resource based on by focusing on areas that we think can make a 3 gram upgrade which we will need in meeting mine plan but realizing that we cannot mine at 2 or 3 gram upgrade because it's not always totally continuous. We report the resources above 1.5 gram product which includes the necessary an estimate of the necessary dilution that we might have to have in the mining but it's just an estimate and sometimes it's been inferred of specially it's water based drilling but we think it gives us the better sense of the grade we might achieve but you know when you get to (indiscernible).
Tony Makuch

So actually if you look for resources and into reserves, anywhere it's depending on the area anywhere from 25% to 35% internal dilution. So below 3 grams in the resource and taking the reserve is anywhere from 8% to 15% additional dilution on the reserves, is that correct?

Stephen Walker - RBC Capital Markets

Just a follow-up, it's counter intuitive but I see a cutoff grade of 1.5 grams and then I see in the resource category and I see 5.1 grams versus the cutoff grade of 3 grams and a reserve grade of 4.6 average for Timmins West. I’m finding it to reconcile why you can get a sharply higher resource grade 5.1 we’re using half their cutoff grade and it just doesn’t make sense.

Tony Makuch

We’re not converting, the conversion factor for the resources to reserve is somewhere between and some of that area is 16%, 17% so that’s part of it Stephen. That’s the main factor, some areas just don’t get converted.
Stephen Walker - RBC Capital Markets

Okay, I may follow-up with some questions later after the call and then that conversion factor is just directly related to the proximity to the existing infrastructure presumably that 60%?

Tony Makuch

The mine ability, we don’t necessarily apply conversion factor. It's just the calculation what zones get, what parts of the resource actually make it to reserve and what parts don’t at this point in time.

Eric Kallio

I think part of it, give it's the continuing of the 3 gram product within the very broader 4.5 envelope that’s all we need to follow with these deposits that they I mean the continuing at 3 is not perfect. And as you’ve wider space drilling they are not able to put perfect boundaries. So then you’ve to you’re trying to capture, you don’t want to make too tighter boundaries otherwise you will totally underestimate the total resource. So coming up with confidence of what you think how much potential you’ve but conversion rate 60% to 70% I mean that’s it could vary. But you don’t know how much can be converted.
Tony Makuch

And we got to continue the drilling and do follow-ups in areas that we didn’t convert and/or changes in gold prices et cetera that maybe may affect them coming into the reserve later on.

Operator

Thank you. The next question is from Derek MacPherson from MPartners. Please go ahead.

Derek MacPherson - Mpartners

So I just had a quick question and I’m going back to the reserves and resources, you mentioned in the press release there are some changes to your assumptions not just on the gold price, can you kind of go over those in a little bit more detail?

Tony Makuch

I will let Eric talk about some of the assumptions in the resource, reserve calculations that we use in the block model.
Eric Kallio

The block model is it's basically it's on an interpretation of zones like as we mentioned before that tight target 3 gram grades but providing lower grade material as necessary to have continued zones. That’s mentioned within the envelope (indiscernible). Our capped grades within the zones are capped, they fund calculations we think we do of the information from drill hole and usually they are in between 50 and 90 grams per tonne. In terms of the classification is done based on indicated resources mostly being defined by maximum of 30 meter search radius although we do estimate that charter ranges where possible and in fact can (indiscernible) up to a maximum of 60 meters and so we also put requirements on the number of samples used for the estimates. All of our estimates pretty much use at least that’s under three composites [ph] a minimum of three hole and at Timmins mine it's at least three holes with two. So, that’s basically the broad parameters that we apply to it.

Derek MacPherson - Mpartners

Was there any material change in those assumptions from last year to this year?
Eric Kallio

Not really. I think the biggest change was due to the target [ph] changes through the interpretation. We have with the tighter space drilling, we’re able to recognize things that happen in the geology and that we reflect in the resource model and we have also noted these lower grade areas that we say yes they make the 1.5 gram but they don’t have enough higher grade materials that we think we can convert them to mineable blocks. So the drilling was all not totally zero, it's basically a good portion of it is just lower grade when they took out the models.

Tony Makuch

See there are some things that need to be tied, I mean part of that what’s Eric is talking about within the port free zone and you had folks in port free could be 6000 to 80,000 tonnes stoke that we would be mining and you come in at 3 grams and it would mean sometimes we’re a victim of our success, we can mop that place so quickly that will go to our mill, that would take up all our mill capacity and all our mine capacity and was having some impacts. So we look at those, we said there are places in there where we can carve out and selectively will be lying some lower grade areas or some that and try to selectively will be lying some lower grade areas or some that and try to improve the grade and carve out the stoke so you leave some pillars the internal pillars between stokes that are lower grade or could be considered lower grade or even as incremental or maybe as incremental or help but on the big picture it affected us so we try to look at ways to improve economics of the operation.

Derek MacPherson - Mpartners

And then just following that up on the exploration budget for ’14 and this is probably a little more straight forward question. Is that going to be a capitalized or expensed?

Meri Verli

Well it is exploration and yes it will be capitalized because it's mostly outside of the resource basically so yes.

Derek MacPherson - Mpartners

Sorry it will be capitalized?
Meri Verli

Yes.

Derek MacPherson - Mpartners

And then just on I guess then on the capital budget which is my last question, can you remind us again what the CapEx budget is for ‘14?

Tony Makuch

Well I mean it's included in our all-in sustaining cost but we’re somewhere between $45 million and $50 million.

Derek MacPherson - Mpartners

And does that include the drilling?

Tony Makuch

Yes pretty close, yes I would say.
Kerry Smith - Haywood Securities

Tony the CapEx, it was around 45 million but is that kind of evenly spread out over the year or will it be more weighted to any particular quarter?

Tony Makuch

Well it is somewhat spread out to the year expect we do have two big projects in our CapEx this year. We have tailings expansion, a tailings areas we’re building and we have water pond at Timmins West which are really the best part of the time for them to be done and construction is Q2 and Q3. So those two big projects would add up to just around $10 million in Q2, Q3. So there is a slight increase in those two quarters.

Kerry Smith - Haywood Securities

 

And then on the G&A and go forward basis what sort of number should we be using for Lake Shore? Like excluding share based compensation.

Tony Makuch

Well $9.5 million.

Kerry Smith - Haywood Securities

Per year?

Tony Makuch

Per year, yes.

Kerry Smith - Haywood Securities

 

Because the number you had this year I think it was 12 or something, I can’t remember it. Did that include share based comp or does that exclude it share based?

Meri Verli

It does include the share based payments and I believe the number without that is around 10.5 million.

Kerry Smith - Haywood Securities

 

Okay. For 2013 Meri it was 10.5 excluding the share based comp?

Meri Verli

Yes I believe so.
Kerry Smith - Haywood Securities

Okay.

Tony Makuch

And going forward we’re forecasting about 9.5.

Kerry Smith - Haywood Securities

 

And just had a couple other questions here, what about the unit costs for 2014, or even what you had in Q4 your all-in mining cost on a per tonne basis. How are they trending?

Tony Makuch

I will let Dan Gagnon talk to that actually.

Dan Gagnon

Actually we’re trending quite well, Q4 basically you know we will be low on unit cost basis we will be low the budget and trending in the first quarter. We’re doing the same, so we’re roughly budgeted to be below $100 with both our mine but we’re trending even lower than that
Kerry Smith - Haywood Securities

And what is the milling cost is built into that 100 a tonne?

Dan Gagnon

Well that’s excluding the milling cost, the milling cost is budgeted to be, oh it is included sorry and it's budgeted at roughly $22 per tonne.

Kerry Smith - Haywood Securities

And these are all Canadian right?

Dan Gagnon

Yes.

Kerry Smith - Haywood Securities

So 22 a tonne for the milling and what was the G&A number would be on a per tonne basis? Or what’s the mining cost I guess.
Meri Verli

 

You mean the G&A at the mine?

Kerry Smith - Haywood Securities

Right.

Meri Verli

 

Because the G&A really like it's 9.5 million and (indiscernible) cash cost, the corporate G&A and what Dan is saying roughly $100 per tonne does include whatever G&A we have at the mines.

Tony Makuch

G&A our overheads in Timmins is somewhere around $3 a tonne, trucking is 650 a tonne, milling 22 and mining at Bell Creek has a little bit of different mining rate than Timmins mine but somewhere around $65 to $75 a tonne.

Dan Gagnon

I believe doing better than our forecast.
Tony Makuch

Bell Creek we don’t truck, so the trucking only applies to Timmins.

Kerry Smith - Haywood Securities

And then you said Bell Creek were around 75 a tonne for mining and Timmins West is about 65ish then?

Dan Gagnon

Yes fair enough.

Kerry Smith - Haywood Securities

And what should we use for depreciation on a per ounce basis, on a go forward basis? I think Meri said it was around 500 million of undepreciated cost, so would that get appreciated over the current reserve? So that’s going to be over a 100 million a year or what should we use for depreciation number?

Meri Verli

 

Well, we normally depreciate, I call it to depreciate over measured an indicated resources so it's not depreciated over the reserve. I haven't done the calculations but roughly I think maybe $400 per ounce but pretty much maybe 350 to 400 close to that.
Kerry Smith - Haywood Securities

Okay but if I use the CAD500 million of book value and depreciate it over the current resource that would be roughly correct?

Meri Verli

Yes roughly that.

Kerry Smith - Haywood Securities

And then the last question I had you had this Macquarie Lease [ph] which I guess happened just before the end of the year. So that 7.3 million of cash would have gone into your year-end cash balance I’m presuming. Was that a lease against some of your mining equipment underground or what was it? It said it was mobile equipment, I’m presuming that sort of it was.

Phil Yee

Yes that sale lease back was a 36 pieces of equipment that were owned on our books.
Kerry Smith - Haywood Securities

Like trucks and scoops and that kind of stuff?

Phil Yee

That’s right.

Kerry Smith - Haywood Securities

Okay and that 7.3 million of cash it did go into your year-end reported cash balance is that correct?

Phil Yee

Yes it did.
Unidentified Analyst

First of all I would like to congratulate you guys on reducing your operating cost, it's a great job. But the question I have is about your impairment charges. It was a pretty significant one in 2013 and it essentially wiped out all of your profit. I’m just wondering because it was based on depletion of your existing mines what do you forecast your impairment charge to be for 2014?

Meri Verli

We don’t forecast anything for 2014. With the current gold prices and with the current cost and our current resource we think *we should be fine . Of course these gold prices go down then you know that is another scenario but that’s anybody guess basically but no we don’t forecast anything.

Tony Makuch

By the way if gold prices go up and we add to our resources then the value goes back up again, might have to bring it up. It's the opposite.

Unidentified Analyst

So just quickly, without an impairment charge forecast what do you expect your profit to be for 2014?
Tony Makuch

Well we expect to generate I mean you’re talking about profit before depreciation and amortization?

Unidentified Analyst

I’m talking about net profit.

Tony Makuch

Well we expect to generate net free cash flow this year somewhere between $15 million and $25 million. We don’t necessary work on profit from that perspective, but from an EBITDA point of view or from an operating cash flow point of view we do expect to generate free cash.

On the operating level it's $1300 gold as we have given, you can look at our projections of cost, you can see it should generate *somewhere around 60 million to 65 million of operating cash flow and then we have debt servicing, we plan to put about 35 million towards debt repayment et cetera and so exit the year with building up our cash position.
Unidentified Analyst

Okay so after your interest payments you expect to still meet 15 million to 20 million you said?

Tony Makuch

Yes.

Unidentified Analyst

Okay that’s a good number.

Tony Makuch

Not just interest and debt principal payments. We intend to pay about close to $20 million to $25 million directly towards debt principal this year.

Unidentified Analyst

Okay and after that payment you still expect to have cash?

Tony Makuch

Yes.

Unidentified Analyst

That’s great news. Thank you very much.
Kerry Smith - Haywood Securities

I just had one other question maybe Eric can answer this, the 3 million exploration you’re capitalizing it all. So should I interpret that to mean that the bulk of the drilling you’re playing through this year would be really trying to identify incremental and inferred resources that you would add to your resource number at year-end and I thought we shouldn’t expect an increase in say 2P reserves by the end of next year. Am I interpreting that correctly Eric?

Eric Kallio

Yes well the exploration program itself is $3 million that’s *exactly where it's targeting either new discovery or additions to infer but we do have an ongoing program of within the mining budget already, it's working on converting inferred.

Tony Makuch

Yes 3 million is outside of that. We’re already spending on close to $10 million in inferred et cetera. So this is over and above that and we’re also assessing some other resource areas we’ve that are not into our reserve at all yet that could be brought into our 2P reserves
Kerry Smith - Haywood Securities

And the 10 million Tony that’s included in the say 45 to 50 of capital that you are planning to spend this year?

Tony Makuch

Well some of that might even be in our operating budget too.

Kerry Smith - Haywood Securities

Okay I see in the operating cost, okay.

Tony Makuch

It's either in the operating cost. It's definitely in the $1000, it's all-in sustaining cost.

Kerry Smith - Haywood Securities

So with the goal this year would be to try and replace ounces mined then in terms of reserves?
Tony Makuch

At a minimum replace what we mine in terms of reserves and really bring ourselves back up to much higher levels. We want to, just one thing, though we’re trying to work towards you know like we have said 3 to 5 years of reserves ahead of ourselves. We don’t want to get too far, reserves too far ahead of ourselves because then it sort of sets up the challenge that we’re putting too much money into reserves in the long term and/or we will then try to mine a little bit faster.
Jamie Kasprowicz - RBC Capital Markets

 

Just a quick question and sorry if I missed this, but the 160,000 to 180,000 ounce production, rough guidance over the next five years that’s based on 3500 tonne per day throughput versus the design capacity around 3000 is that correct?

Tony Makuch

Pretty much, it's maybe about #3250 tonnes per day *capacity. Our mill plant now is way over 3000. Let’s just not call it a 3000 tonne a day mill now it's a much higher production rate than that in terms of long term. We know we have excess mill capacity than our what our two mine plants can operate at right now and so we need to work out what we can do to get our mining rate up overtime but everything is based on about 3250 to 3500 tonnes per day.
Jamie Kasprowicz - RBC Capital Markets

 

Okay so it's more, because I know the front end is around 5500 tonne per day, you guys can handle, the backend is really. I guess my question is around the backend, for the backend can handle sustained 3000 to 3500?

Tony Makuch

Maybe 3250 to 3750 or something like that.

Jamie Kasprowicz - RBC Capital Markets

 

Okay and we should expect recoveries to remain relatively stable going forward, 96% to 97% range?

Tony Makuch

Yes with all the resources the reserves areas that we’re mining, yes, I mean unless we bring some different ore and that has different recovery rates but for the most part, yes.

Operator

Thank you. There are no further questions registered at this time. I would like to turn the meeting back over to Mr. Utting.

Mark Utting

Thanks very much operator. Thanks very much again everyone for participating in the call. Just in terms of things coming up we will be filing all our AIF and our annual filings as well as the technical report for Timmins West Mine by the end of this month. Also the next thing we will look to is our first quarter production release in early April and then we have our Q1 results and annual meeting in early May, Annual Meeting being May 7th.

So thanks again for participating and we will have more information out to you in the very near future. Thanks very much.