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Edited Transcript of AGI.TO earnings conference call or presentation 2-May-19 3:00pm GMT

Q1 2019 Alamos Gold Inc Earnings Call

Toronto May 11, 2019 (Thomson StreetEvents) -- Edited Transcript of Alamos Gold Inc earnings conference call or presentation Thursday, May 2, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* James R. Porter

Alamos Gold Inc. - CFO

* John A. McCluskey

Alamos Gold Inc. - President, CEO & Director

* Peter K. MacPhail

Alamos Gold Inc. - COO

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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

* Fahad Tariq

Crédit Suisse AG, Research Division - Research Analyst

* Howard Flinker

* John Charles Tumazos

John Tumazos Very Independent Research, LLC - President and CEO

* Kerry Smith

Haywood Securities Inc., Research Division - VP & Senior Mining Analyst

* Michael Parkin

National Bank Financial, Inc., Research Division - Mining Analyst

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen. I would now like to turn you over to Mr. Jamie Porter, Chief Financial Officer. Please go ahead.

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James R. Porter, Alamos Gold Inc. - CFO [2]

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Thank you, operator, and thanks, everyone, for attending Alamos First Quarter 2019 Conference Call. In addition to myself, we have on the line today both John McCluskey, President and CEO; and Peter MacPhail, Vice President and COO.

I'd like to remind everyone that our presentation will be followed by a Q&A session. On this call, we will be making forward-looking statements. Please refer to the disclaimer on forward-looking statements in our news release and MD&A as well as the risk factors set out in our annual information form. All forward-looking statements on this call are qualified by these cautionary statements.

There can be no assurance that our forward-looking statements, even though considered reasonable by management based on information on hand, will prove to be accurate. Future results and events could differ materially.

Technical information in this presentation has been reviewed and approved by Chris Bostwick, our Vice President of Technical Services and a qualified person. Also, please bear in mind that all the dollar amounts mentioned in this conference call are in U.S. dollars unless otherwise noted.

Now John will provide you with an overview.

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John A. McCluskey, Alamos Gold Inc. - President, CEO & Director [3]

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Thank you, Jamie. We have a strong start to the year, producing 125,300 ounces of gold in the first quarter at significantly lower costs from 2018. All of our sites performed well, led by Island Gold, which achieved records for both quarterly production and free cash flow.

Consolidated total cash cost of $732 per ounce and all-in sustaining cost of $957 per ounce were both better than budgeted and represented a 5% and 3% decrease from the fourth quarter, respectively.

We're expecting production and total cash costs to be in a similar range in the second quarter followed by a further improvement in our costs in the second half of 2019. With the strong start to the year, we are well on track to achieving our full year production and cost guidance.

We continue to advance our various internal growth initiatives and are nearing the turning point where we will see the benefit in the form of significant free cash flow growth.

At Young-Davidson, we met budgeted underground mining rates in the quarter while continuing to work on the lower mine expansion. If you haven't already done so, I would encourage you to take a look at our website where we recently added virtual tours of both the Young-Davidson and Island Gold mines. There's some great photos of the lower mine construction at Young-Davidson, which helps illustrate the impressive scale of the operation.

The work on the lower mine expansion and the tie-in of the upper and lower mines remains on track to be completed during the first half of 2020.

Island Gold continues to shine with higher grades throughput driving new records of the operation for both production and free cash flow. We believe there are many more records to come at this operation through Phase 2 and Phase 3 expansions. We're also seeing good ongoing results from our large exploration program at Island Gold, some of which we will be including in an exploration update we plan to release later next week.

Alamos produced its 2 millionth ounce of gold in March, a significant milestone, which also marked the end of the 5% royalty that the operation had been paying since the start of production in 2005. At current gold prices and production rates, this will save us approximately $10 million per year.

We also celebrated the completion of the voluntary relocation of the town of Mulatos in March. As part of the relocation, we invested in several projects, including the construction of 21 new homes, a new education center, a community hall, a church and a medical clinic. We're proud of these investments and the long-term benefits these new facilities will provide to the community.

Last, but certainly not least, we received the operating permit for Kirazli in March and now have all the major permits required for the start of full-scale construction. We will be ramping up construction activities through the year and expect initial production at Kirazli in the latter part of 2020 contributing to the strong production and free cash flow growth in 2021.

I'll now turn the call over to our CFO, Jamie Porter, to review our financial performance. Jamie?

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James R. Porter, Alamos Gold Inc. - CFO [4]

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Thank you, John. Gold revenues in the first quarter of 2019 were $156 million based on the sale of approximately 120,000 ounces at average realized price of $13.04 per ounce. Gold production in the first quarter was 5,600 ounces more than what we sold with those ounces benefiting our second quarter financial results.

Overall, we had an excellent first quarter with global gold production, cost and capital in line with guidance.

Total cash cost of $732 per ounce and all-in sustaining costs of $957 per ounce were in line with guidance and ahead of what we budgeted for the first quarter, reflecting higher costs at Young-Davidson, offset by substantially lower costs at Mulatos. We are expecting similar consolidated total cash costs in the second quarter while all-in sustaining costs are expected to increase reflecting a catch-up of sustaining capital expenditures.

Operating cash flow before changes in noncash working capital were $62 million or $0.16 per share. A reported net earnings of $17 million or $0.04 per share included unrealized foreign exchange and other gains totaling $6.5 million. Excluding these gains, our adjusted net earnings were $10 million or $0.03 per share.

Amortization expense was $39 million in the quarter or $329 per ounce, slightly below full year guidance of $345 per ounce. Corporate G&A expense of $5.5 million was consistent with guidance and remains among the lowest in our peer group.

Capital spending totaled $53 million in the first quarter, including $16 million of sustaining capital, $34 million of gross capital and $3 million of capitalized exploration. This was lower than budgeted with some spending at both Mulatos and Island Gold deferred into the second and third quarters of the year.

Combined with the ramp-up of spending at Kirazli, we expect higher capital spending the next few quarters to maintain our full year guidance of between $290 million to $315 million for the year.

We were active under our share buyback program during the first quarter, repurchasing a total of 2.6 million shares at an average price of $4.14 per share for a total cost of $11 million. We also paid a quarterly dividend of $4 million or $0.01 per share in March after announcing a doubling of the annual dividend in February.

In total, we returned a record $15 million to shareholders through our share buyback and dividend program in the first quarter.

We closed the quarter with no debt and $181 million of cash and cash equivalents in our balance sheet. Additionally, we have approximately $18 million in equity securities having recently closed the sale of various noncore royalties for $8 million.

We remain in a period of substantial investment and growth capital to expand our operations at Young-Davidson, Island Gold and in Turkey. We expect a transition to a period of strong free cash flow growth starting in the second half of 2020. In the interim, we are fully funded for our internal growth initiatives with existing cash and cash flow.

I'll now turn the call over to our COO, Peter MacPhail, to provide an overview of operations.

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Peter K. MacPhail, Alamos Gold Inc. - COO [5]

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Thank you, Jamie. Our sites performed well across the board in the first quarter with each on track to achieve the annual guidance. At Young-Davidson, underground mining rates of 6,500 tonnes per day and gold production of 45,000 ounces were both consistent with annual guidance.

Mill throughput of 6,800 tonnes per day was below the first half guidance of 7,800 tonnes per day as we deferred processing with frozen low-grade surface stock piles to the warmer months. We expect mill throughput to increase through the spring and summer months until the low-grade stock are depleted sometime in the third quarter.

Total cash cost of $839 per ounce the mine site all-in sustaining costs of $1,068 per ounce were higher than annual guidance due to planned lower grades mined and higher underground maintenance costs.

Cost are expected to decrease through the year reflecting higher grades at lower sustaining capital spending consistent with annual guidance.

Work on the lower mine expansion continues, and we remain on track to complete the tie-in of the upper and the lower mines in the first half of 2020.

As previously guided, this tie-in will require approximately 3 months of downtime of the Northgate shaft, which will impact throughput and production rates. Once completed, we expect mining rates to increase to about 7,500 tonnes per day in the second half of 2020 and towards 8,000 tonnes per day in 2021.

Island Gold produced a record 35,600 ounces during the first quarter, up 23% from the previous record of 29,000 ounces in the fourth quarter of 2018. The increase was driven by higher mine grades of 11.4 grams per tonne, and higher mining and billing rates, which both averaged around 1,100 tonnes per day in the quarter, consistent with that annual guidance.

Total cash costs of $497 per ounce were consistent with guidance and down 15% from 2018 levels. Mine site all-in sustaining cost of $649 per ounce were lower than annual guidance, reflecting the timing of sustaining capital spending.

Looking ahead, we expect to permit a Phase 2 expansion of the operation to 1,200 tonnes per day by the end of this year, and are working on a study of how to best approach Phase 3 expansion of the operation beyond 1,200 tonnes per day.

We've seen above average rainfall at both Young-Davidson and Island Gold in the past several -- 8 weeks, as you may have seen in the news. To alleviate any concerns, this has not impacted our operations nor we do expect it to.

Mulatos had a strong quarter producing 38,900 ounces at total cash costs of $743 per ounce and mine site all-in sustaining costs of $809 per ounce. Production was consistent with annual guidance. And while costs were well below plan reflecting higher grade stack, a lower waste-to-ore ratio and the recovery of 2,000 ounces in concentrate from the mill.

Total cash costs and mine site all-in sustaining costs are expected to return to guided levels for the remainder of the year.

At Lynn Lake we're working to finalize an updated feasibility study on the project incorporating the reserve growth over the past year as well as other evaluationary initiatives designed to improve the economics. We expect to have the updated study completed midyear.

After receiving the operating permits for Kirazli in March, we finalized several key contracts, including the mining services and earthworks contract. We expect to begin prestripping the open pit within the next month with construction activities ramping up through the year.

We remain on track for initial production towards the end of 2020, which will bring consolidated production to over 600,000 ounces per year in 2021 while significantly lowering our cost profile.

With that, I'll turn the call back to John.

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John A. McCluskey, Alamos Gold Inc. - President, CEO & Director [6]

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Thank you, Peter. I'm now going to ask the operator to open the lines and start the Q&A session.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from Fahad Tariq from Crédit Suisse.

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Fahad Tariq, Crédit Suisse AG, Research Division - Research Analyst [2]

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This is Fahad from Crédit Suisse. Just a few questions from me. First on the buybacks. Can you provide some more guidance on maybe the rest of the year? Is -- are the Q1 level of the buyback, call it 2.5 million shares, is that kind of the cadence or is that what we should be expecting for the rest of the year every quarter?

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James R. Porter, Alamos Gold Inc. - CFO [3]

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Our buyback approach is going to be opportunistic as there are downturns in the share price and we can buy the stock at a discount. We're going to continue to do that. But we're certainly not providing guidance on our buyback program. I don't know anybody who would do that.

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Fahad Tariq, Crédit Suisse AG, Research Division - Research Analyst [4]

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Or let me rephrase then. The level of buybacks in Q1, is that -- was that opportunistic or is that something like is it -- some companies will do it more on a scheduled basis, is that something...

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John A. McCluskey, Alamos Gold Inc. - President, CEO & Director [5]

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No. We're not scheduling our buybacks. That's the point I'm trying to make. We're going to buy back when we see opportunities to buy back. And it's not on some sort of plan or schedule or anything else. We might buy 0 shares, in other words, between now and the end of the year or we might buy a lot. It's going to be guided by our view of the market.

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Fahad Tariq, Crédit Suisse AG, Research Division - Research Analyst [6]

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Okay. Just switching gears. On Island Gold, any color on the Phase 3, I know it's early stages, but what level of throughput is kind of in the works there, like order of magnitude away from the 1,200 tonnes per day?

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Peter K. MacPhail, Alamos Gold Inc. - COO [7]

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Yes. So our Phase 2 expansion is really just a permitting exercise. I'll start with that. The mill is capable of doing 1,200 tonnes a day and the mine is currently capable of doing 1,200 tonnes a day. We're looking -- and so that's a simple one and it won't cost us anything.

For Phase 3, we're looking at the various options that come to mind with a mine like this, do you just keep extending the ramp, do you do a shaft. Each of those have different ultimate throughputs. I think we said in the Investor Day that we had earlier this year that certainly somewhere around 1,500 tonnes a day would be a reasonable sort of target that we'd be approaching with this. And depending on the options, it could be more.

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Operator [8]

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Our next question is from Cosmos Chiu from CIBC.

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Cosmos Chiu, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research & Equity Research Analyst [9]

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Maybe first off on Young-Davidson here. Looking at it, there were some frozen stockpiles in Q1. I just want to get a better understanding here in terms of, for the rest of the year, given that the stockpiles, the lower-grade stockpiles will get processed in Q2 and Q3 at the mill, are we going to be expecting higher throughput but potentially lower grade given that a part that will be comprised of the lower-grade stockpiles? So that's going to happen in Q2 and Q3? And then in Q4, are you going to go back to sort of the mill throughput matching the underground throughput but with higher grades?

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Peter K. MacPhail, Alamos Gold Inc. - COO [10]

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Yes. That's right, Cosmos. I mean 6,500 tonnes a day from the underground will be processed at the grades that we guided to. Really, the low-grade stockpiles are just factored around 1 gram or thereabouts. We top up the mill with that material, and we will do that through the year. But really, it adds maybe a couple of thousand ounces to our ounce profile in any quarter. It's not -- it doesn't really move the needle at all.

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Cosmos Chiu, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research & Equity Research Analyst [11]

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Yes, for sure. And then, Peter, you talk about gaining efficiencies in the upper mine, and that's been the target in the past quarter and certainly last year as well. What have you learned in the upper mine? that you can certainly apply to your lower mine when that connection happens in 2020?

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Peter K. MacPhail, Alamos Gold Inc. - COO [12]

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The lower mine is -- as you would have seen in our investor presentation and the video and the animation we have on our website, is that quite a different animal is designed to be 8,000 tonnes a day. It's 50% bigger stopes, the sublevels are greater. We'll be conveying ore more than trucking ore and bigger skip capacity. The bins are also a big -- that would be the biggest thing that we've learned with the upper mine as well and on top of all of that, I mean, we do have kind of limited bin capacity in the upper mine, which kind of limits us to that 6,500 to 7,000 tonne a day range. With the lower mine, we're going to have 2 days of ore [squares] in front of us at all times. So...

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Cosmos Chiu, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research & Equity Research Analyst [13]

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Yes. Maybe switching gears a little bit here going to Island Gold. Peter, you talked about getting the permit to get up to 1,200 tonnes per day. Right now, you're limited to 1,100 tonnes per day. Could you maybe remind me how things work again? Because in Q1, you average about 1,133 tonnes per day at Island Gold.

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Peter K. MacPhail, Alamos Gold Inc. - COO [14]

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Yes. So our -- we have an annual permit that limits us to 100 tonnes per day. That's how it works.

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Cosmos Chiu, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research & Equity Research Analyst [15]

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So does that mean that some time in Q3 and Q4, you'll need to be under 1,100 tonnes per day unless the permit's retroactive given that in your Q1, you are slightly over?

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Peter K. MacPhail, Alamos Gold Inc. - COO [16]

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I think our efforts here will be to get that permit secured in time that we don't have to be under 1,100 tonnes per day at any time during the year.

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Cosmos Chiu, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research & Equity Research Analyst [17]

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Okay. I got it. And maybe a quick question for Jamie here. Looking at Kirazli and Turkey, certainly, you're looking at the Turkish lira, it's been all over the place. Just wondering how you're mitigating that risk in terms of foreign exchange and what have you put in place?

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James R. Porter, Alamos Gold Inc. - CFO [18]

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Yes. So I mean our guidance for this year I think is $75 million spending at Kirazli. We only just started that in the first quarter. So we're ramping up and spending now. But the vast majority of our spending this year is actually U.S. dollar-based. We negotiated a mining contract that's in U.S. dollars with no real clause where we're exposed to the Turkish lira. So our TL exposure this year is about 20 million. And we're looking at ways to manage that in terms of hedging it.

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Cosmos Chiu, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research & Equity Research Analyst [19]

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And maybe one last question. Jumping back to Peter here. Sorry about that. At Mulatos, 66% recovery, and Q1 you're looking to target 70% recovery in 2019, could you maybe talk about that in terms of how you can improve on that recovery? Is it just a mix of different sources of ore coming from the different pits?

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Peter K. MacPhail, Alamos Gold Inc. - COO [20]

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Yes. Cosmos, it's really just timing. We stacked our better grades towards the end of the quarter, and those assets will come out in Q2.

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Operator [21]

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Our next question is from Kerry Smith from Haywood Securities.

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Kerry Smith, Haywood Securities Inc., Research Division - VP & Senior Mining Analyst [22]

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Peter, just on your tailings facilities in Northern Ontario, the 2 that you've got, have you any issues with all the rain? I know some of the companies have had to shut their mills down temporarily while they deal with all the excess water. Just wondering how your facilities are set up.

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Peter K. MacPhail, Alamos Gold Inc. - COO [23]

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Yes. No, Kerry, we haven't had any issues at all really. Our tailings facilities are designed for the kind of weather that we see from time to time in Northern Ontario. They're both operating at levels well within their design parameters. And we don't expect that to the -- not on the (inaudible) again either, but we still don't. We're in good shape there. We're in good shape from a water perspective at both sites.

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Kerry Smith, Haywood Securities Inc., Research Division - VP & Senior Mining Analyst [24]

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Okay. okay. Great. And then just for Jamie, a second question on Kirazli. I know you let the mining contract and you've ordered a few other contracts. Are the costs that you've awarded in those contracts kind of in line with what you had in your feasibility numbers? Or are they a little bit better or a little bit worse? I'm just trying to get a flavor for how the costs are coming in.

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James R. Porter, Alamos Gold Inc. - CFO [25]

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Yes. I think they're in line, Kerry.

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Operator [26]

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Our next question is from Mark (sic) [Mike] Parkin from National Bank Financial.

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Michael Parkin, National Bank Financial, Inc., Research Division - Mining Analyst [27]

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One question with the tie-in on Young-Davidson. Do we have a sense of will it be concentrated in Q1 of next year? I know it's equally split between Q1, Q2. Or when could we expect a definitive timing on it?

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John A. McCluskey, Alamos Gold Inc. - President, CEO & Director [28]

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Yes, we'll probably provide some more definitive guidance towards the end of this year as it comes closer. But it'll be basically 3 months at some point in H1 of next year.

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Operator [29]

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Our next question is from John Tumazos of John Tumazos.

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John Charles Tumazos, John Tumazos Very Independent Research, LLC - President and CEO [30]

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Whenever the Kirazli mine turns from a cash consumer to a cash generator, maybe the middle of next year per your guidance, how long will be the time window when Alamos is flowing cash before the next major project, either Lynn Lake or Agi Dagi or a different one starts to go under construction to use cash?

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John A. McCluskey, Alamos Gold Inc. - President, CEO & Director [31]

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Yes. This is John McCluskey speaking. I don't think we're going to pin ourselves down to a specific date. We're going to be watching the gold price. Generally, the gold price will tell you what the market is looking for. If prices are very high and our operations are generating really strong free cash flows, then we'll approach it more aggressively. But if the gold price is very weak and we want to just produce free cash and slow down growth, we can do that.

So we're in a fortunate position where we can actually time our production pipeline. We can time our growth pipeline. And we're going to take full advantage of that. We're not going to go rushing headlong into something in a weak old price environment. The idea is to remain flexible.

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John Charles Tumazos, John Tumazos Very Independent Research, LLC - President and CEO [32]

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John, there's always different large and small gold companies putting things up for sale but sometimes the things that are up for sale have their own issues. Just as an example, Anglo Gold is selling something in Colombia, something in Argentina that's -- the open pit's going underground and 41% of something in [moly]. Probably, those kinds of things are irrelevant to Alamos. Could you just review what your acquisition criteria are with regard to geography, size, so we might get a flavor as to how relevant or irrelevant some of our other companies' divestitures might be?

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Peter K. MacPhail, Alamos Gold Inc. - COO [33]

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Well, I'd say they're largely irrelevant to us right now, and that's mostly because we have absolutely no intention of doing any acquisitions. We were very active between 2014 and 2017. I think that was the ideal time in the market to be acquiring things. The last time we acquired something, gold was sub-$1,200 an ounce. That's Richmont Mines. And even in those market conditions having bought something that was -- it's proving to be tremendously valuable, we were not -- the acquisition was not well-received. In other words, it's really tough even when you've got a good idea and good value, it's really tough to get shareholders' support and market support when you go to make those kinds of things -- deals like that.

I feel that what you're getting at is do we have an acquisition strategy. And in fact, we -- you can see what our acquisition strategy is just by looking at the deals that we've done over the last 5 years. And it's been acquiring things in the same jurisdiction, things that have relevant size and make a relative impact on our production and our growth and things that ultimately are going to be first quartile costs.

So that would just about fit every mining company's profile. They're all trying to find really good assets, long life, safe location, low cost. Everybody is talking from the same song sheet there. But the bottom line is we've got 5 years of track records that show that we've been doing just that.

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Operator [34]

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Our next question is from Howard Flinker from Flinker & Company.

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Howard Flinker, [35]

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I have a question and a comment. The question is in an all-in sustaining costs in CapEx, are those Canadian dollars or U.S. dollars? I didn't hear clearly.

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James R. Porter, Alamos Gold Inc. - CFO [36]

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Those are U.S. dollars.

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Howard Flinker, [37]

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Both. Both?

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James R. Porter, Alamos Gold Inc. - CFO [38]

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Yes.

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Howard Flinker, [39]

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And as the acquisitions, sometimes your perspective is more profitable in the long run and clearer than those of investors. So just do what you think is right and what will make you a good rate of return in the long run, not necessarily by tomorrow morning. And by a good rate of return, I don't mean what's a good rate of return in the gold mining business where managers often share their profits and it comes out to a 5.5% rate of return. Just keep doing what you think is right and in the end, it'll work out. If you listen to short-term investors, you can't run your business. That's my only comment.

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John A. McCluskey, Alamos Gold Inc. - President, CEO & Director [40]

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Well, we appreciate that. Thank you.

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Operator [41]

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(Operator Instructions) We do have another question from [Thurman Willis], a private investor.

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Unidentified Shareholder, [42]

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Good quarter. I was listening to some comments by the IAG President, CEO yesterday, and he made comments that he expected massive consolidation in the mid-tier group. And with us selling at such a discount relative to our peer group, does that not cause you concern? But how do you feel about consolidation, as he stated, and again, we are so far under our peer group where at one time, we were above our peer group. So could you comment on that, please?

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John A. McCluskey, Alamos Gold Inc. - President, CEO & Director [43]

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Well, I guess I could comment on it. I feel that we've done a very good job over the last couple of years literally transforming ourselves from a single asset producer with roughly 150,000 ounces of production and a strong balance sheet into a real mid-tier mining company with in excess of 0.5 million ounces of production and very good growth. It was a very contrarian approach to take. But frankly, the way you make money in a commodity-based business where you've got real cyclicality underpinning the whole business.

Most of the industry was not active. Only a very few companies were active and aggressive making acquisitions. And so there is a need for a number of companies out there. They're looking at reductions in their reserves. They're looking at a lack of growth. And if there's going to be a need on their part to merge or acquire, I'd say in large measure, we're not that interested. We think that we're trading at a pretty significant discount to our net asset valuation. Our net asset valuation continues to grow. And with the -- just the very exciting developments that we have in the company that are coming up over the next 2 years, we're really looking forward to our valuation normalizing.

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Unidentified Shareholder, [44]

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And one follow-up there. Are we roughly trading at about 0.7 to our peer group's 1.15? I mean are we trading at that much of a discount? I mean what I'm trying to say is the discount, considering your prospects, appears to me to be overdone. Are my figures of about 0.7 to the peer group about in line?

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John A. McCluskey, Alamos Gold Inc. - President, CEO & Director [45]

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I think so. Just on the research reports that I've read over the last couple of months, I think your estimates are fairly accurate.

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Operator [46]

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There are no further questions at this time. This concludes this morning's call. If you have any further questions that have not been answered, please feel free to contact Mr. Scott Parsons at (416) 368-9932, extension 5439. Thank you.

The conference call has now ended. Please disconnect your lines at this time, and we thank you for your participation.