Q2 2018 Kirkland Lake Gold Ltd Earnings Call
Aug 01, 2018 PM UTC
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NMI.TO - Kirkland Lake Gold Ltd
Q2 2018 Kirkland Lake Gold Ltd Earnings Call
Aug 01, 2018 / 05:30PM GMT
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Corporate Participants
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* Anthony Paul Makuch
Kirkland Lake Gold Ltd. - President, CEO & Director
* Douglas F. Cater
Kirkland Lake Gold Ltd. - VP of Exploration for Canadian Operations
* Ian Holland
Kirkland Lake Gold Ltd. - VP of Australian Operations
* John Landmark
Kirkland Lake Gold Ltd. - VP of Exploration for Australia
* Mark E. F. Utting
Kirkland Lake Gold Ltd. - VP of IR
* Phil Yee
Kirkland Lake Gold Ltd. - EVP and CFO
* Pierre Rocque
Kirkland Lake Gold Ltd. - VP of Canadian Operations
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Conference Call Participants
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* Cosmos Chiu
CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research & Equity Research Analyst
* Dan Rollins
RBC Capital Markets, LLC, Research Division - Head of Global Mining Research and Analyst
* John Charles Tumazos
John Tumazos Very Independent Research, LLC - President and CEO
* Steven Howard Butler
GMP Securities L.P., Research Division - MD of Equity Research & Gold Analyst
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Presentation
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Operator [1]
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Good afternoon. My name is Jessa, and I will be your conference operator today. At this time, I would like to welcome everyone to the Kirkland Lake Gold Second Quarter 2018 Conference Call. (Operator Instructions) Thank you.
Mark Utting, Vice President of Investor Relations, you may begin your conference.
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Mark E. F. Utting, Kirkland Lake Gold Ltd. - VP of IR [2]
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Thanks very much, operator, and good afternoon, everyone. With me today are many members of the Kirkland Lake Gold senior management team, including Tony Makuch, our President and Chief Executive Officer; Phil Yee, our Executive Vice President and CFO; our 2 Country Operations Heads, Pierre Rocque, Vice President of Canadian Operations, and Ian Holland, Vice President of Australian Operations; as well as our 2 Heads of Exploration, Doug Cater, who is Vice President of Exploration, Canada, and John Landmark, Vice President of Exploration, Australia. There are several other members of the management team in the room as well.
Today, we'll be providing comments on our results for the second quarter and first 6 months of 2018. Tony will review the key consolidated results and then take a look at our performance against our guidance. Phil will then discuss our financials in more detail. Ian Holland and Pierre Rocque will then discuss the operating results from Australia and Canada, respectively. And finally, we'll have Doug Cater and John Landmark review recent exploration results, which we have released to the market.
Following the presentation, we'll open the call up to questions. The slide deck that we will be referencing during the call is available on the website at www.klgold.com, and also the website link is on the homepage as well.
Before we get started, I'd like to direct you to our forward-looking statements on Slide 2. Our remarks and answers to questions today may contain forward-looking information about future events on the company's performance. Please refer to the detailed cautionary note in Slide 2 of the presentation and forward-looking information set out in the news release dated August 1, 2018 and the MD&A for the 3 and 6 months ended June 30, 2018.
Also during today's call, we will be making references to non-IFRS performance measures. A reconciliation of non-IFRS performance measures is available in the MD&A for the 3 and 6 months ended June 30 as well as the press release. Finally, please note that all figures today are expressed in U.S. dollars unless otherwise specifically stated.
And with that, I'll turn the call over to Tony Makuch, President and CEO of Kirkland Lake Gold.
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Anthony Paul Makuch, Kirkland Lake Gold Ltd. - President, CEO & Director [3]
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Yes. Thanks, Mark, and good afternoon, everyone on the call. As always, I'd like to start by thanking the people at Kirkland Lake Gold, whose achievements are what drives our company's success. We've had a lot of success this quarter, a lot of people working very hard in Canada, both in Taylor Mine and Macassa Mine. We had some solid operating performance in the quarter. Similarly down in Australia at Fosterville, really strong, strong performance, and that's a reflection of the hard work of the people.
And we've had exceptional exploration success at Fosterville on the exploration side. Exploration teams had a lot of good results happening at NT. We haven't really talked much about what's going on at NT, but we -- a lot of people working pretty hard in the Northern Territory. And we had some pretty good exploration success in Canada, a lot of areas, particularly at Macassa. So thanks, everyone, for your hard work, and we really appreciate what's being done.
Beginning on Slide 4, I'll start here. And looking at the second quarter of 2018, I guess you can sum it up that we had 2 of the -- 2 of our -- the world's highest-grade gold -- 2 of the world's highest-grade gold mines performing extremely well in the quarter. Macassa had a record quarter production with grade of 21.5 grams per tonne, cash operating costs well below targets. At Fosterville, the mine had one of its best quarters ever, driven by record production in June of almost 32,000 ounces. Unit costs at Fosterville continued to be ahead of plan and were significantly better than the previous quarter.
Driven by the performance of Macassa and Fosterville, we reported solid financial results in Q2 '18. And then this is going now to Slide 5. You can see here we reported strong growth in net earnings from both the same time last year and the first quarter, record quarterly cash flow from operations and EBITDA, and a significant increase in our cash position to $318 million with no debt.
Also, for the second time, we increased our dividend, with our Q2 dividend in July being $0.03 per share for the quarter.
Turning to Slide 6. I'll look at our production in more detail. We produced over 164,000 ounces in Q2 of 2018, which compared to 160,000 ounces for the same period in 2017, and 148,000 ounces last quarter. Looking at the comparison to last year, production grew 10% if you exclude the contributions from mines currently on care and maintenance. As mentioned, Macassa production of just over 60,000 ounces was a quarterly record and was up 33% from the similar quarter in Q2 '17 and 12% from the last quarter of this year.
The increase from both prior periods were primarily grade-driven. At Fosterville, production of 77,000 ounces was similar to the prior year and was a 21% increase from Q1. Like Macassa, the grade performance at Fosterville has been excellent.
Holt and Taylor, our other 2 operations, did not have particularly strong quarters. At Holt, we had a planned 21-day shutdown to replace the shaft guides. This work went extremely well and really bodes -- sets the mine up now for some solid operating performance in the second half of this year and going into next year.
The new guidance -- sorry, we'll move on from that. Production at Taylor was affected by lower-than-planned grades. However, we just completed a very strong July at Taylor and with average grades approaching 6 grams per tonne. We expect to perform better throughout the second half of 2018, again both at Taylor and at Holt.
Turning to unit costs as shown on Slide 7, our consolidated cost performance was very strong. Operating cash cost per ounce averaged $404, well below our consolidated guidance for the year of $425 to $450, and significantly better than both Q2 2017 and the previous quarter. As with production, the key drivers of our strong cost performance were Macassa and Fosterville. Macassa's cash costs were very low, averaging $414 per ounce, a 19% improvement year-over-year and a 17% better than Q1.
The gain was grade is the key driver for the improvements. Cash costs at Fosterville averaged $239 an ounce. This compared to $220 in last year's second quarter and was 17% better than $287 in Q1. Cash costs at Holt and Taylor were higher than expected. As mentioned, we expect to see improved results for both operations in the second half of the year and both operations meeting our plans for the year, both in production and costs.
Looking at Slide 8, all-in sustaining costs in Q2 '18 averaged $757 per ounce, very much in line with target levels and a marked improvement from $833 in the previous quarter. The improvements from Q1 were mainly driven by Macassa, where all-in sustaining costs averaged $687 per ounce in Q2 versus $818 the previous quarter. We benefited not only from improved cash costs at Macassa, but we also had lower sustaining capital expenditures on a per ounce sold basis.
All-in sustaining cost was higher than the $729 average in Q2 2017. The increase reflected higher all-in sustaining costs at Holt, Taylor and Fosterville, which offset lower cost at Macassa. The increase at Fosterville was mainly due to higher sustaining capital expenditures per ounce sold, which are planned for this year and are setting us up for several years of production growth.
Speaking of growth, moving to Slide 9, we have a number of growth projects on the goal, which are all aimed at getting Kirkland Lake Gold to 1 million ounces of annual production over the next several years. Slide 9 provides the review of these projects, where work is expected to ramp up in the second half of the year. Growth capital expenditure for the year-to-date totaled $15.7 million. This excludes about $12 million of capitalized exploration.
A significant amount of work in the first half of the year was related to permitting, engineering and, in some cases, surface work. At Macassa, surface excavation for the #4 shaft is advancing, and we are on track to commence shaft collaring, headframe construction, and hoist installation during the second half of the year. We remain on track to commence full shaft sinking by the second quarter of 2019, and to achieve completion of Phase 1 of the shaft project by early 2022. That's Phase 1. That's with a 5,450 loading pocket and a 5,300 level station. We still have the shaft targeted to go down to 7,000 feet, which would happen following this and would be completed by the end of 2023.
At Fosterville, the rate of underground development for our ventilation project is increasing. We're making good progress with our water treatment plant. We are also advancing drilling up the surface holes for our new paste plant. The plant's construction is to commence shortly. We have completed installation of a second gravity circuit at our Fosterville mill, with the circuit coming operational as of the end of July. Our time lines for completion of Fosterville's project remain at or close to the original schedule.
The actual installation of the gravity circuit is pretty exciting because now it potentially is going to get a gravity recovery here to well -- to 50% -- or targeting 50% if you think about it. This is an ore body which 3 years ago, there was 0 gravity recovery, completely refractory. And getting the gold out in this fashion is really a testament to a lot of good work for people but also the exciting part of how great an ore body we have here at Fosterville.
Based on the year-to-date 2018 results, we ended the first half well positioned to achieve a full-year 2018 guidance. As shown on Slide 10, production for year-to-date 2018 of 312,000 ounces compared favorably to our full-year consolidated guidance of over 620,000 ounces. Operating cash costs at the end of June of $424 per ounce were better than our target range. Year-to-date, all-in sustaining costs averaged $793, well within our guidance of $750 to $800.
On a consolidated basis, we are well positioned relative to our guidance for the year. And what that indicates is that over the balance of 2018, we expect continued strong operating results, both in terms of production and unit costs; increased growth capital expenditures as progress with key project -- sorry, with key projects accelerates; and a continued strong commitment to exploration, where we are -- where we incurred $44 million of expenditures in the first half of the year, and we remain on track of total expenditures of $75 million to $90 million; probably closer to the top end of that target.
Based on our strong year-to-date results, this morning we announced also improvements in our 2018 guidance, which are outlined in Slide 11. Consolidated production is now targeted at over 635,000 ounces, which is an increase from our over 620,000 ounces previously. Our guidance for consolidated operating cash costs has also improved to between $400 and $425 per ounce, from $425 to $450 previously.
At Macassa, we now expect to produce between 220,000 and 225,000 ounces in the year at average cash costs between $460 and $480. At Fosterville, we now expect to produce between 275,000 and 300,000 ounces of gold at cash costs of $250 to $270. That is an improvement from target production of 260,000 to 300,000 ounces at cash costs of $270 to $290.
With that, I will now turn the call over to Phil Yee, our EVP and CFO.
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Phil Yee, Kirkland Lake Gold Ltd. - EVP and CFO [4]
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Thank you, Tony, and good afternoon, everyone. Starting on Slide 13, Tony has already mentioned our strong earnings growth in Q2 2018 and our record operating cash flow.
I'll start with earnings. Net earnings in Q2 2018 totaled $61.5 million or $0.29 per share, a 78% increase from Q2 2017 and a 14% improvement from the previous quarter. All of our net earnings in Q2 of 2018 as well as Q1 of 2018 related to continuing operations. In Q2 2017, our results included a loss from discontinued operations of $3.8 million related to the Stawell Mine, which was sold last December.
Compared to last year's second quarter, the main factors driving our strong earnings growth include an increased sales and revenue, lower production costs, higher levels of other income, reduced depletion and depreciation expenses and lower finance costs. For the next few minutes, I'll review these factors in more detail.
Starting with revenue, as shown in Slide 14, revenue in Q2 2018 totaled $214.7 million, an increase of 13% from Q2 of 2017. Higher gold sales in Q2 2018 increased revenue by $16.5 million, with a total of 164,305 ounces sold in Q2 of 2018. A $44 per ounce or 4% increase in the average realized gold price per ounce contributed $7.2 million to the growth in revenue in Q2 2018 from a year ago. There was also a $1.1 million favorable impact from foreign exchange rate changes.
Compared to the previous quarter, revenue increased 8% from $198.2 million in Q1. An 11% increase in gold sales from 147,763 ounces last quarter had a $22.1 million favorable impact on revenue in Q2 of 2018. This favorable impact was only partially offset by a $5.3 million negative impact on revenue from the $32 reduction in the average realized gold price compared to Q1. In addition, there was also a $300,000 reduction related to changes in foreign exchange rates.
Turning to Slide 15. We reported record earnings from mine operations in Q2 2018 totaling $109.5 million, an increase of 45% from Q2 of 2017 and 12% from the previous quarter. The increase from the same period in 2017 reflected strong revenue growth as well as lower production costs, largely due to the inclusion of $15.7 million of production costs for the Northern Territory operations in Q2 of 2017.
Also contributing to the year-over-year improvement in earnings from mine operations was a $3.4 million or 9% reduction in depletion and depreciation costs, as the impact of higher gold production was more than offset by a significant increase in the level of depletable mineral reserves and mineral resources. You may recall we had a large increase in reserves and resources with the release of our December 31, 2017 estimates in February of this year.
The increase in earnings from mine operations from the previous quarter related to solid revenue growth, the impact of which was partially offset by an increase in depletion and depreciation costs, in line with higher production volumes during quarter 2 of 2018.
Working our way down the income statement. On Slide 16, earnings before income taxes in Q2 of 2018 totaled $90.1 million, a 61% increase from Q2 of 2017 and 17% higher than Q1. In addition to the change in earnings from mine operations, other factors contributing to the increase from a year ago were higher other income and reduction in finance costs. Higher other income mainly reflected the impact of unrealized and realized foreign exchange gains on U.S. dollar investments, which more than offset a noncash loss on fair valuing of warrants. Lower finance costs related to maturity of our 2 series of convertible debentures in 2017, one at the end of June and the other in December. As a result, we do not have the interest costs related to those debentures in 2018.
Turning to EBITDA on Slide 17. As you have heard, we had record quarterly EBITDA in Q2 of 2018. EBITDA totaled $123.7 million, which was 30% higher than $95.1 million in Q2 2017 and a 17% increase from $105.9 million in Q1 of 2018. One item on Slide 17 I want to highlight involves current income taxes. As you can see, despite significantly higher pretax income compared to Q2 of 2017, our current income tax expense was lower in this year's second quarter than it was a year ago. The reduction reflects the utilization of $16.3 million of deferred tax assets to reduce current income tax expense in Q2 2018.
Turning to Slide 18. Supported by higher levels, revenue -- higher levels of revenue and profitability, we generated record cash flow from operations and strong free cash flow in Q2 2018. Cash flow from operating activities of continuing operations in Q2 2018 totaled $120.9 million, a 56% increase from $77.5 million in Q2 2017 and 35% higher than $89.6 million in Q1 of 2018. Free cash flow from continuing operations in Q2 of 2018 totaled $60.7 million, an increase of 18% from the $51.2 million in Q2 of 2018 (sic - see slide 18, "2017") and 21% from $50.2 million in Q1 of 2018.
Finally, Tony mentioned our strong growth in cash during Q2 2018, where the company ended the quarter with $318.4 million of cash on the balance sheet. Slide 19 highlights the key factors in increasing cash in the current quarter. Our June 30 cash position was $43.1 million or 16% higher than at the beginning of the quarter.
The increase largely related to strong cash flow from operating activities, the timing of capital and exploration expenditures, as well as the release of $19.8 million of previously restricted cash. The release of restricted cash resulted from changes to security requirements related to rehabilitation performance guarantees. These factors were partially offset by the use of $16.1 million of cash to acquire 4 million common shares of Novo, $10.4 million to fund finance lease obligations, and $3.3 million for dividend payments.
As you can see, the company entered the second half of 2018 with a very strong balance sheet and remains very well positioned to fund its growth plans going forward.
With that, I'll turn the call back to Tony.
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Anthony Paul Makuch, Kirkland Lake Gold Ltd. - President, CEO & Director [5]
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Okay. Thanks, Phil. Over the next few slides now, Ian Holland and Pierre Rocque will provide an operational review of the second quarter. And then we'll have our Heads of Exploration, both John Landmark and Doug Cater, update you on recent exploration results.
So with that, I'll turn the call over to Ian Holland, VP of Operations, Australia.
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Ian Holland, Kirkland Lake Gold Ltd. - VP of Australian Operations [6]
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Thanks, Tony. So referring to Slide 21. We had a very strong quarter at Fosterville in Q2 with almost 77,500 ounces recovered. In fact, that was the second highest total in the operation's history. This was based on an average grade of 20.6 grams per tonne milled for the quarter, with a grade of 30.4 grams in June, really driving a record monthly production for that month, with a little short of 32,000 ounces.
The 2 images on the right-hand side of the slide are our long section and cross section, and they highlight where this material was mined from over the course of the quarter. As can be seen, there was some exceptional grades in stoping, in particular on the 4,140 and the 4,200 levels within the Lower Phoenix system. The strong production result drove strong unit cost performance, with operating cash costs of $239 and all-in sustaining costs of $538 per ounce for the year -- for the quarter.
The other key point to make on this slide is that we've seen a ramp-up in key projects over Q2, which is expected to accelerate further in the second half. So with ventilation, the ventilation upgrade, our lower raise is nearing completion, with the rig then to be relocated to surface, to the upper hole. The paste fill permitting is in progress and we're currently drilling surface delivery holes. The water treatment plant construction is in progress and is progressing well. And the gravity upgrade has been completed, with the final commissioning expected to be completed next week. These are important foundation pieces for Fosterville as we continue the path to a planned annual production of in excess of 400,000 ounces per annum by 2020.
So with that, I'll pass over to Pierre Rocque.
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Pierre Rocque, Kirkland Lake Gold Ltd. - VP of Canadian Operations [7]
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Thank you, Ian. On the production front, this was a solid quarter for Canadian operations, especially at Macassa, where we're showing an increase in tonnage, grade and ounces produced when compared to Q1. This is putting us in a good position to achieve our 2018 guidance. If you look at the top right corner of the slide, you will see the location of the stopes, mostly in the SMC area, that were mined during the quarter.
On the cost side, Macassa had a good quarter and first half of the year, coming below guidance. We're planning increased capital spending in the second half of the year compared to the first half, mainly due to timing of deliveries and the height of the construction season. In addition to the #4 shaft project, which is progressing as per our schedule, we have started construction of our north tailings storage facility.
I will now turn it over to Doug Cater.
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Douglas F. Cater, Kirkland Lake Gold Ltd. - VP of Exploration for Canadian Operations [8]
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Good afternoon. I am speaking to Slide 23. On July 5, we realized -- we released exploration drill results from our Macassa Mine on our South Mine Complex, or SMC, exploration drill program. Recent drilling on the 5,300 level has identified an area which we have termed high potential, where drill intercepts are both high-grades, with grades greater than 30 gram per tonne gold, and with widths greater than 3 meters in true width within this Eastern extension of the South Mine Complex.
The reported intersections are located approximately 560 meters south-southeast of the location for the #4 shaft, with Phase 1 targeted for the completion of early 2022. The SMC continues to expand as drilling intersects strong mineralization to the east.
At Taylor, the company has a total of 6 surface drills actively targeting the up-dip and down-dip extensions of the West Porphyry Zone and testing for mineralized extensions in the vicinity of the shaft and shoot deposits.
Our exploration programs are well advanced at this point in time, with exciting results being reported from the SMC at Macassa and successful drilling at Taylor, which is expected to expand the mineral resources.
I'll now hand back to you, John.
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John Landmark, Kirkland Lake Gold Ltd. - VP of Exploration for Australia [9]
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Thanks, Doug. Good day, all. And it's a pleasure to give you an update on our Australian exploration activities.
So let me dive right into Fosterville, and I'll take you 1 kilometer underground to the view of the Swan infill drilling. So this is on Slide 25 in your pack there. This is a long section view, looking to the west of the Swan resource and reserve blocks. To give you a sense of scale, the light gray grid lines that you see are about -- are 250 meters apart. The yellow colored shape with the orange horizontal development is the Swan mineral reserves. That's currently reported as 1.16 million ounces, has an average grade of 61 grams per tonne gold.
To the left of this, in the lilac color and plunging to the south, is the Swan mineral resource. Drilling intercepts into the Swan Zone are then shown as dots on this slide. Now if you look at the black dots, those are the holes that we used for the December 27 resource estimate. The red dots are holes that we drilled in quarter 1 this year.
And I'd draw attention to the 3 intercepts. You can see them documented in the top left-hand corner of the slide. We reported earlier this week 191 grams per tonne gold over 2.2 meters, 134 grams per tonne gold over 11.9 meters, and 167 grams per tonne over 3.6 meters. And those intercepts are all estimated true widths. These holes will all support our resource upgrade from inferred to indicated.
Another point to make is that the purple colored dots that you see indicate intercepts that we have actually drilled but we're still processing either in logging, sampling, assaying and incorporating into the geological models.
Moving to the next slide, Slide 26. You'll see that there's now a spread of blue dots on the section. These are holes that we're currently drilling or we will complete by the end of the year. Our objective is to get a large portion of the lilac block -- this is shown here above the red dotted line in the diagram -- to a drill spacing of 25 meters by 25 meters. This will give us the confidence to upgrade the mineral resources in this area from inferred to indicated. In turn, when we compete mining engineering design and we have input from the engineers, we expect this volume to become part of the Swan Zone mineral reserve.
If you look at the current resource numbers in the top left of the slide, we currently report indicated resources of 171,000 ounces at 116 grams per tonne gold and inferred resources of 671,000 ounces at 36.6 grams per tonne gold. In our view, it's not unreasonable to expect that by the end of 2018, we will have substantially lifted the Fosterville Mine mineral reserve, which currently stands at 1.7 million ounces. And we can also expect to see the overall mine reserve grade lift beyond the current 23 grams per tonne gold average.
I want to stress, though, that this is only a subset of our overall exploration activity. And moving on to Slide 27, I can expand further. On this slide, we now zoom out to a 9-kilometer long section view of the Fosterville system. Drilling will commence later this year to the south of Harrier as we progress development of the exploration drill drive. And it's worth reminding you that at Harrier, we have seen high-grade visible gold in quartz-carbonate vein material as we mined deeper into the parts of this system. This is very similar to what we encountered at Phoenix as we progressed deeper there over the last 2 years.
Similarly, at Robbin's Hill on the right-hand side of the diagram, some 9 kilometers to the north of Harrier, we reported higher-grade visible gold intercepts at depth in May this year. We now have another 2 surface rigs drilling there.
This slide also shows you the traces of drill holes, which we will complete at Fosterville by the end of the year, with some 6 rigs both on surface and underground covering this ground. So in addition, we've got 3 rigs outside of this view that you see, which are testing Fosterville look-alike targets elsewhere on our exploration leases.
Turning our attention away from Victoria, I'd like to briefly mention our activities in the Northern Territory. At the Cosmo Mine site, we've continued with underground development and exploration drilling and have stepped up to having 4 rigs there. 65 kilometers away, at Union Reefs, we have 2 surface rigs testing the prospects and Lady Alice lode systems at depth. And during the second quarter, we put out a news release which drew attention to the positive grade results and depth extensions that we've encountered from our drilling there.
In summary, we have 15 drill rigs operating in Australia. We are on track to complete over 300 kilometers of drilling this year, and that is actually an 80% increase than what we did last year. And we anticipate a very significant resource-to-reserve conversion at Fosterville in the second half of this year.
With that, let me hand back to Tony.
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Anthony Paul Makuch, Kirkland Lake Gold Ltd. - President, CEO & Director [10]
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Okay. Thanks, John, and also, thank Ian, Pierre and Doug for the update. And I get a sense we have a lot of exciting things happening, a lot of good performance in the company, but a lot of exciting things happening going forward.
Just to sum up on Slide -- I believe I'm on Slide #28. We had a very successful first half of 2018, and this has allowed us to increase our guidance for the year. We reported strong earnings growth, record cash flow, and we ended June with a very strong cash position. Our projects are advancing well, and we continue to achieve significant exploration success, as both John and Doug gave you an update. And we continue to grow towards 1 million ounces of annual production.
In finishing, I'd also on behalf of the people and the management and the board and the shareholders and myself personally, I would like to thank Phil Yee for his contributions to the success of KL Gold. Phil made a big difference and definitely will be missed in the company. And this is your last quarterly presentation for KL, and again, thanks Phil.
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Phil Yee, Kirkland Lake Gold Ltd. - EVP and CFO [11]
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Thanks, Tony.
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Anthony Paul Makuch, Kirkland Lake Gold Ltd. - President, CEO & Director [12]
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And with that, we will be happy to take any questions. Thanks.
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Questions and Answers
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Operator [1]
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(Operator Instructions) Your first question comes from the line of Steven Butler from GMP Securities.
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Steven Howard Butler, GMP Securities L.P., Research Division - MD of Equity Research & Gold Analyst [2]
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Congratulations again on a nice quarter. The Q2 -- Phil, a question for you before you leave. On the Q2 deferred tax assets, you recognized $16.3 million. Can you maybe give us a sense for what remains in that category and how the cash taxes might begin to flow or not flow or how much sell-through you have on cash taxation going forward here?
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Phil Yee, Kirkland Lake Gold Ltd. - EVP and CFO [3]
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Sure, Steve, if you refer back to the December year-end financial statements, the deferred tax asset balance is about USD 70 million. So we've used about $28 million -- I think it's $28.1 million of that so far.
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Steven Howard Butler, GMP Securities L.P., Research Division - MD of Equity Research & Gold Analyst [4]
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Okay. And so that's really predominantly Australia? Or is that Canada as well?
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Phil Yee, Kirkland Lake Gold Ltd. - EVP and CFO [5]
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That's Australia.
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Steven Howard Butler, GMP Securities L.P., Research Division - MD of Equity Research & Gold Analyst [6]
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That's Australia, okay.
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Phil Yee, Kirkland Lake Gold Ltd. - EVP and CFO [7]
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Yes, yes.
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Steven Howard Butler, GMP Securities L.P., Research Division - MD of Equity Research & Gold Analyst [8]
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Okay, got it. And good luck in your next endeavor, Phil.
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Phil Yee, Kirkland Lake Gold Ltd. - EVP and CFO [9]
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Thank you very much, Steve.
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Steven Howard Butler, GMP Securities L.P., Research Division - MD of Equity Research & Gold Analyst [10]
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Maybe John, one for you, a question here on cutoff grades. In your resource declaration for the indicated and inferred, remind us again what cutoff grades you've assumed for the Swan Zone.
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John Landmark, Kirkland Lake Gold Ltd. - VP of Exploration for Australia [11]
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Sorry, Steve, just in terms -- are you referring specifically to cutoff grades or to talk -- you're not talking about top-cuts, are you?
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Steven Howard Butler, GMP Securities L.P., Research Division - MD of Equity Research & Gold Analyst [12]
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More in the bottom end, more in the cutoff grade on the bottom end, John.
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John Landmark, Kirkland Lake Gold Ltd. - VP of Exploration for Australia [13]
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Yes, we use -- we generally use about 3 grams. But Ian, do you want to confirm that?
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Ian Holland, Kirkland Lake Gold Ltd. - VP of Australian Operations [14]
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Yes. Steve, it's Ian Holland. From a resource perspective, the cutoff grade was 3 grams. The reserve grade is a little variable depending upon the exact level, but 3 to 3.5 grams, in that order.
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Steven Howard Butler, GMP Securities L.P., Research Division - MD of Equity Research & Gold Analyst [15]
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Okay. Because gentlemen, I did the calculation of the weighted average grade of the 21 holes you released just yesterday. I came up with approximately 39 grams per tonne, which I think is -- I think that's accurate. So it sort of corroborates the inferred resource grade thus far, but I was wondering if there was something that you think we might be missing in that calculation or -- because if the cutoff grade is near 3, then I think the math was correct.
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Ian Holland, Kirkland Lake Gold Ltd. - VP of Australian Operations [16]
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I have to confess, Steve, you've probably done more work on it than I have at this stage because -- but no, that's about right, yes.
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Steven Howard Butler, GMP Securities L.P., Research Division - MD of Equity Research & Gold Analyst [17]
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Yes. Okay, okay. And then, Ian, here for Fosterville on the mill throughput, I mean, obviously, Q2 again was slightly lower than Q1. You're focusing on ounces and making sure the mining is right and going for grade, et cetera. So how does it look in the third quarter? I know Harrier will start to contribute maybe even a bit more. But does the mill throughput look to perk up a little bit into Q3 or maybe into Q4? And how do you think the grade profile will trend Q3 and Q4 overall?
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Ian Holland, Kirkland Lake Gold Ltd. - VP of Australian Operations [18]
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Yes. Thanks, Steve. In terms of throughput, we see on current forecast a relatively small increase into Q3 and Q4, and it really is driven by Harrier South coming online and starting to contribute to a greater degree. Grade performance at this point, we see relatively flatline. We do start to see some Swan stoping in the second half, but it's a fairly minor by percentage contributor, and it is the very upper levels of it which aren't the highest-grade levels. So from a grade contribution, we expect Swan to be a bigger impact in 2019 and beyond. So if that answers the question?
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Steven Howard Butler, GMP Securities L.P., Research Division - MD of Equity Research & Gold Analyst [19]
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Yes, I think that does. Upper Swan, but versus 60 grams reserve grade, what are we talking about reserve grade Upper Swan?
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Ian Holland, Kirkland Lake Gold Ltd. - VP of Australian Operations [20]
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I don't have the precise numbers, but it's a bit less than that in grades -- in grades higher as we go lower.
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Operator [21]
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Your next question comes from the line of Dan Rollins from RBC Capital Markets.
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Dan Rollins, RBC Capital Markets, LLC, Research Division - Head of Global Mining Research and Analyst [22]
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Back to Fosterville, following up on Steve's questions. I was just wondering if you might be able to provide a little bit of guidance on how you anticipate getting to that 400,000 ounce per year run rate roughly in 2020. Just wondering where the -- is this all grade related? Or do we start to see the mill throughput start to kick up as you get the benefit of Harrier and you start to be able to get the ventilation in and you can start pushing the mill a little bit harder? Just trying to get some idea of how we get to that 400,000 level on a sustainable basis.
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Ian Holland, Kirkland Lake Gold Ltd. - VP of Australian Operations [23]
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Yes, thanks, Dan. Ian Holland here. I'll take that one. It's predominantly grade driven. So there is an increase in Lower Phoenix shaft lode, so Swan and other lenses as we move deeper into that system. That's the single biggest contributor, but there is also an expected volume increase as we bring more of Harrier South online as well.
And I guess important to note, the lower most levels of Harrier South are at the highest grade in Harrier South that we have in the reserve. So that adds a double impact to that. So it is a bit of both, but it's largely the grade impact.
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Dan Rollins, RBC Capital Markets, LLC, Research Division - Head of Global Mining Research and Analyst [24]
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Okay. So you're running around 1,350 a day -- tonnes per day right now in the mill. Where do you see that -- do we get back to 1,600, 1,700? Sort of what's the sort of long run rate you're targeting there?
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Ian Holland, Kirkland Lake Gold Ltd. - VP of Australian Operations [25]
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So closer to that sort of number, Dan. And I guess I will point out that doesn't fill the mill at current capacity, even at that rate, which is more like 2,300 tonnes per day. So that remains a future opportunity to us.
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Dan Rollins, RBC Capital Markets, LLC, Research Division - Head of Global Mining Research and Analyst [26]
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So where -- like, again, I throw some numbers out there, but what's sort of tonnes per day you're targeting here longer term?
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Ian Holland, Kirkland Lake Gold Ltd. - VP of Australian Operations [27]
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So the 400,000 ounce per annum plus plan that was outlined, we've built on something more like 700, 800 tonnes as you are outlining.
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Dan Rollins, RBC Capital Markets, LLC, Research Division - Head of Global Mining Research and Analyst [28]
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Okay, perfect. And how sustainable right now in the current reserve resources and what you see ahead of you is that 400,000 ounce level? Is it a 1 or 2 years at that level? Or do you think you can maintain it for a few years?
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Ian Holland, Kirkland Lake Gold Ltd. - VP of Australian Operations [29]
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If we base it on the reserve, we can see it for a number of years. If we look at the likely resource -- the reserve conversion that John has spoken about, then we need to see that extending further. And then it really is a question of how successful the drilling programs are going forward, given that we are focusing on the higher-grade trends not just in Lower Phoenix but also in Harrier, and looking at the potential for higher grades at depth at Robbin's Hill.
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Dan Rollins, RBC Capital Markets, LLC, Research Division - Head of Global Mining Research and Analyst [30]
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Okay, that's very helpful. And then just on the mining costs at Swan, is it -- I'm assuming just given the smaller system there, the mining costs are going to be a little bit higher. Is it 10% to 15% higher? Or is it a little bit more just on that Swan contribution?
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Ian Holland, Kirkland Lake Gold Ltd. - VP of Australian Operations [31]
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We would expect it to be broadly similar. The mining method isn't different. We are introducing paste, so there is a cost that comes with that. But that is offset by the cost of the current cemented rock fill system. So we'd expect it to be broadly similar.
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Dan Rollins, RBC Capital Markets, LLC, Research Division - Head of Global Mining Research and Analyst [32]
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Okay, perfect. Moving on to Canada, maybe one for you, Tony. I've asked this before, but you've got an underutilized mill sitting up at Holt. You've got Holt, sort of not much money being put in the ground there just given that royalty. You've got Holloway that's probably got ounces left and potentially more upside if you can get the royalty restructured. Where do you stand right now, potential negotiations, to reduce the burden of that royalty and then open up some potential new value creation for investors?
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Anthony Paul Makuch, Kirkland Lake Gold Ltd. - President, CEO & Director [33]
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Well, just to put up one thing; first off, with what we're doing at Holt and Taylor, we're pretty much -- we're pretty close to filling that mill. Going forward, I know we're working -- definitely, we're having good discussions with the royalty holders in terms of what to do there. And we're working towards building a plan to reestablish this production at Holt and Holloway to previous levels.
And then if that comes to fruition, that will require us to then increase the Holt mill to further -- to handle the increased production that's going to come from Taylor. So we think that area is pretty exciting. It's a little bit too early to talk, but we intend to create a lot of value for our shareholders at Holt, and that's working with our royalty holders in terms of coming up with the best alternative.
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Operator [34]
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(Operator Instructions) Your next question comes from the line of Cosmos Chiu from CIBC.
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Cosmos Chiu, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research & Equity Research Analyst [35]
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Maybe just a few questions from me here. First off, in Australia, Ian, maybe can you confirm, are you getting into the Swan Zone in the second half of 2018? And how many stopes have you sort of planned to be mining out of at Swan? The reason for my question, I know Swan is very high-grade, and outperforming stope can sway one way or an underperforming stope can sway it the other way. Do you see it as a potential risk in terms of that happening either in Q3 or Q4?
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Ian Holland, Kirkland Lake Gold Ltd. - VP of Australian Operations [36]
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Yes. Thanks, Cosmos. Just in terms of the contribution from Swan, we have exposed it on 3 levels in development already. We have mined in a stope some Swan material that was largely Eagle material, but it was at the juncture. So that has already commenced. I don't know an exact number for you of strictly Swan stopes in the second half, but it's only a small number.
What we've seen to date, and it's fair to say over the last year or 2, on average in the structurally complex high-grade areas we're seeing some grade overperformance. So there is some volatility that comes with that, but we are -- we have actually growing confidence in our ability to estimate that and predict those grades going forward. So we think that's reasonably well played.
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Cosmos Chiu, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research & Equity Research Analyst [37]
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Okay. Maybe switching gears a little bit in terms of Canada here. It's good to see that Macassa is performing well. And a lot of my colleagues and the other guys on the call have asked about this, the other operations. But the one that I want to talk about is Taylor, like in terms of guidance for 2018. Considering what has been done since the first half, in the first half of 2018, do you see any risk in terms of not getting to that full-year number?
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Anthony Paul Makuch, Kirkland Lake Gold Ltd. - President, CEO & Director [38]
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Go ahead, Pierre.
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Pierre Rocque, Kirkland Lake Gold Ltd. - VP of Canadian Operations [39]
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Cosmos, it's Pierre. At this point in time, the numbers that we released for Taylor, we are confident in meeting them. We had a few bumps in the road in the first half, and we're planning a substantial increase in throughput with a little bit of help with grade there. We will meet -- we'll cover the difference of what we didn't do in the first half and finish the year within guidance.
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Cosmos Chiu, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research & Equity Research Analyst [40]
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Okay. So we should expect a higher grade profile. How about throughput? Is that -- can that go up as well in the second half?
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Pierre Rocque, Kirkland Lake Gold Ltd. - VP of Canadian Operations [41]
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Yes, it's mostly going to be throughput.
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Cosmos Chiu, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research & Equity Research Analyst [42]
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Oh, throughput.
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Pierre Rocque, Kirkland Lake Gold Ltd. - VP of Canadian Operations [43]
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Yes. Right now, we're targeting about 1,000 tonnes per day, give or take, at Taylor. We're going to increase that in the range of 1,200 to 1,400 tonnes per day.
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Operator [44]
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Your next question comes from the line of John Tumazos from John Tumazos Very Independent Research.
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John Charles Tumazos, John Tumazos Very Independent Research, LLC - President and CEO [45]
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Thank you for the good results. The $239 cash cost at Fosterville makes it feel like the 1980s. We're all less than half our age.
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Anthony Paul Makuch, Kirkland Lake Gold Ltd. - President, CEO & Director [46]
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Yes.
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John Charles Tumazos, John Tumazos Very Independent Research, LLC - President and CEO [47]
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For a reserve replacement at year-end, is a good target for Fosterville 2, 3 times production? Or do you think it could be better?
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John Landmark, Kirkland Lake Gold Ltd. - VP of Exploration for Australia [48]
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John, I think that's a fair range. You've seen what we've got in our resources, and we would anticipate pretty well trying to convert most of that. I think what we've seen, we believe we can convert quite a lot of what we've already got declared as a resource.
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Anthony Paul Makuch, Kirkland Lake Gold Ltd. - President, CEO & Director [49]
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Definitely, the grades support the economic; it's confirming the geological continuity of it, and that's went very well.
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John Landmark, Kirkland Lake Gold Ltd. - VP of Exploration for Australia [50]
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Yes.
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Operator [51]
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There are no further questions at this time. I'll turn the call back over to the presenters.
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Mark E. F. Utting, Kirkland Lake Gold Ltd. - VP of IR [52]
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Okay. Thanks very much, operator, and thanks very much again, everyone, for taking part in today's call. As you've heard, there's a lot going on in our company with solid performance and progress with our growth projects and a very extensive exploration program. So we expect to have a fairly consistent and considerable news flow over the balance of the year. And we look forward to getting an update to the market at the earliest possible time. So thanks again for participating. Have a good day.
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Operator [53]
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This concludes today's conference call. You may now disconnect.
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