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Edited Transcript of ARG.TO earnings conference call or presentation 9-Aug-19 6:00pm GMT

Q2 2019 Amerigo Resources Ltd Earnings Call

Vancouver Aug 19, 2019 (Thomson StreetEvents) -- Edited Transcript of Amerigo Resources Ltd earnings conference call or presentation Friday, August 9, 2019 at 6:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Aurora G. Davidson

Amerigo Resources Ltd. - Executive VP & CFO

* Robert Duncan Henderson

Amerigo Resources Ltd. - President & CEO

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Conference Call Participants

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* Jason Nelson

* John Polcari

* Joseph George Reagor

Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst

* Nauman Toor

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Presentation

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Operator [1]

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Good day, ladies and gentlemen. Welcome to the Q2 2019 investor call.

I would now like to turn the meeting over to Ms. Aurora Davidson. Please go ahead.

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Aurora G. Davidson, Amerigo Resources Ltd. - Executive VP & CFO [2]

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Thank you, Patrick. Welcome to the second quarter 2019 investor conference call of Amerigo Resources. I'm Aurora Davidson, Executive Vice President and Chief Financial Officer.

Before we begin the presentation, let me caution you that our comments and discussions will include forward-looking information within the meaning of applicable securities legislation. Forward-looking information will include, among other things, forecasts and projections about our copper production for the year, which involves known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements to be materially different from such forecasts and projections.

Therefore, although we believe that anticipated future results, performance or achievements expressed or implied by the forward-looking information are based on reasonable assumptions and expectations, you should not place undue reliance on such forward-looking information.

We direct you to our press release issued on August 8, on our other documents filed with the securities authorities in Canada, including our annual information form under the heading Description of the Business Risk Factors. This document describes the material factors and assumptions that were applied in drawing the conclusions and making the forecasts and projections as reflected in the forward-looking information, and the material factors that could cause actual results, performance or achievements to differ materially. Except as required by law, we undertake no obligation to update or revise any forward-looking information made in this presentation.

Rob Henderson, the company's President and Chief Executive Officer, will now provide an operational and corporate update.

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Robert Duncan Henderson, Amerigo Resources Ltd. - President & CEO [3]

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Thank you, Aurora, and thank you, everyone, for joining on the call. The first half of 2019 has been tough. MVC's low production, principally from Cauquenes exacerbated by low copper price has resulted in a very poor financial performance, and Amerigo's earnings for the second quarter 2019 were negative $6.6 million.

The Q2 copper production was low at 13.3 million pounds because Cauquenes material was still being extracted from the same poor-quality zone that affected Q1 2019 production. However, on July 6, MVC completed construction of the new Cauquenes 48-meter level sump, and this new sump enables access to higher-quality material located at the bottom of the deposit. Over the last month, the grade has gone up by about 20%, that is from about 0.23% to 0.27% copper and recovery has also gone up about by 20% from the low 30s to the high 30s. MVC are working on improving the tonnage delivered to the plant, which has been impacted by wet weather in Chile and frequent power cuts.

MVC is also operating its new concentrate regrind mill, thus completing the Cauquenes Phase 2 expansion. The completion of these 2 projects will enable MVC to now focus on improving flotation recovery by circuit modifications and reagent optimizations. We do have a significant asset in Chile and the book value of the plant at MVC is now over USD 200 million.

Our partners continue to demonstrate support for us. Just yesterday, we received confirmation from El Teniente that MVC will be toll treating high-grade slag from their smelter stockpile for a period of 6 months. This is a mutually beneficial agreement to both partners and is an example of our good relationship with Codelco and demonstrates that MVC has the assets and the skills to economically produce copper from mine waste material. The expectation is that MVC will process 1,200 tons per day of slag at MVC's existing plant commencing in August.

In order to accommodate processing of the slag material in the MVC plant, they will dedicate 1 of the 8 mills to slag and will therefore forego some production of copper from El Teniente's tailings, while slag is being processed. The net result is we expect to receive additional tolling revenue this year, and we maintain our copper guidance of 70 million to 75 million pounds. The other good news that we reported on Tuesday is that we have signed a mandate with our existing lender, Scotiabank, to refinance our existing debt facility with the objective to reduce our short-term debt repayment obligations and provide us with more flexibility. We expect to close this facility in Q3, and Aurora will provide some more detail on this.

The bad news is that copper price performance continues to disappoint despite strong fundamental data supporting a copper price of over $3 a pound in the long term. I'm not an economist with a crystal ball, and therefore rely on experts who advices on copper price forecasts. Wood Mackenzie's latest quote is, "We still expect a stronger performance over the second half 2019, which should support an annual average copper price of $3.04 for 2019, a return to above-average mine supply growth of 3.1% of the disruptions in 2020 will not be sufficient to offset slow demand expectations. And in 2020, there will be a deficit in the metal markets and with cathode stocks drawn to lows of just 59 days of consumption, prices are expected to trade sharply higher to reach an annual average peak of $3.65 a pound." So we remain optimistic, but we are taking steps to keep our costs as low as possible.

MVC's recorded copper price for the quarter was $2.67 per pound compared to $3.16 a pound a year ago. The $0.25 per pound drop in copper price from the previous quarter resulted in a negative settled adjustment of $3.2 million due to our 3 terms we have in our concentrates. Aurora will give you some more color on that. At today's copper price of $2.60 a pounds, we expect to generate sufficient operating cash flow to meet our current liabilities. And in part, this is due to the fact that MVC's royalty obligations to El Teniente decreased with a decrease in copper price.

I'll now hand over to Aurora Davidson to discuss the financials.

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Aurora G. Davidson, Amerigo Resources Ltd. - Executive VP & CFO [4]

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Thank you, Rob. The second quarter of the year was indeed a challenging period. The combined effect of low copper price and low production resulted in a net quarterly loss of $6.6 million or $0.04 per share. In Q2 2019, Amerigo produced 13.3 million pounds of copper at a price of $2.67 per pound, a reduction of 10% in production and a reduction of 16% in copper price from Q2 2018. This resulted in a 30% reduction in copper revenue from $29.2 million to $20.5 million between the 2 comparative quarters.

Molybdenum production decreased by 50% in Q2 2019, but we had 3% increase in molybdenum price. The overall decrease of 42% in molybdenum revenue went from $3.2 million to $2.2 million between the 2 comparative quarters. We always track the sensitivity of MVC's financial results to copper prices, and the Q2 results confirm this point. Copper price affects us both in terms of the price used to book sales for the period on a provisional price basis and also for settlement adjustments, which can be positive if copper price appreciates in the 3 months following the month of sale or negative if the sale price drops. In Q2 2019, we booked $3.2 million in negative settlement adjustments to revenue compared to $600,000 of positive adjustments in Q2 2018.

MVC's provisional copper price in Q2, as Rob mentioned, was $2.67. July's price was slightly higher at $2.69 per pound and today's price is $2.60 per pound.

Tolling and production costs in Q2 2019 were $28.8 million compared to $27.2 million in Q2 2018, an increase of $1.6 million or 6%. MVC’s most significant costs are in decreasing order: power, labor, grinding media and lime. These 4 costs combined decreased by 3% or $400,000 in Q2 2019 compared to Q2 2018. However, all other direct costs, which include Cauquenes' processing, maintenance, reagents, et cetera, increased by $1.7 million in Q2 2019 due to accounting inventory adjustments of $1.6 million to account for the difference between production from sales in each quarter and the effect of the higher unit cost of production in 2019. The other components of tolling and production costs are depreciation, which increased by $700,000 in Q2 2019 as a result of the higher asset base at MVC following the Cauquenes Phase 2 expansion. Administration, which decreased by $200,000 and moly costs which increased by $240,000.

Other expenses, including corporate G&A were $1.2 million compared to $1.1 million in Q2 2018, with the increase of $150,000 resulting from higher share-based compensation expense of $250,000 in Q2 2019 compared to the prior comparative quarter. Finance expense was $1.5 million compared to $900,000 in Q2 2018, an increase of $600,000 of which half corresponds to the difference in mark-to-market adjustments in MVC interest rate swaps, and there was a natural increase of $300,000 in interest expense of which $200,000 is coming from the new molybdenum plant expansion lease.

As a result of its loss before income tax decision in the last quarter, the company posted an income tax recovery of $2.3 million compared to income tax expense of $1.1 million in Q2 2018.

With respect to the cash flow first use of the funds, in Q2 2019, the company used cash of $4.8 million to fund operations, including finance expense, which we classify as an operating item. Factoring in working capital adjustments, net cash from operating activities in Q2 2019 was $3 million. The company used $2.9 million in the quarter to pay for capital expenditures and used $8.6 million in connection with debt repayments made at the end of the quarter. The company also received $330,000 from the exercise of stock options.

The net decrease in cash in the quarter was $8.1 million. The company's balance sheet at quarter end showed a cash position of $8.4 million and current assets of over $24 million.

Our current source of stress in the company's balance sheet at the moment is the shortened debt we carry, and I would like to take a few minutes to refresh what type of debt we have, why it's there and what changes we are looking at making in the near term.

MVC's finance at Cauquenes Phase 1 and Phase 2 expansions without any dilution to shareholders by taking 2 loans, both of them with the same lenders. The lenders were originally BBVA Chile and Export Development Canada, EDC. BBVA Chile has since been acquired by Scotiabank, so the loans are now with Scotiabank as lead bank and agent bank and with EDC, each participating on a 50% basis.

The first loan was taken in 2015 for the Phase 1 expansion and was for $64.4 million. The second loan was taken 2 years later in 2017 for the Phase 2 expansion and was for $35.3 million. So in total, both loans were for $100 million.

MVC has met all its scheduled bank payments to date. And as of today, the principal amount that's outstanding on both loans is $56.3 million. The remaining scheduled payments under the existing loans are semi-annual payment of $11.3 million each plus interest on December 30 and June 30 for 2.5 more years, with the final payment scheduled for December 30, 2021. This schedule is stressing the balance sheet. As essentially $22.5 million plus interest are shown as a current liability as they are scheduled to be paid in the next 12 months.

When we face operational stresses that affect cash flow generation, such as what we have seen in the current year, we feel we would all sleep better at night if we could push our near-term debt maturities and that's what we approach our lenders to discuss with a very positive response so far.

On August 6, we issued a press release announcing MVC has executed a Finance Mandate Agreement with Scotiabank as lead bank to rearrange the repayment of MVC's existing debt in a way that pushes out near-term debt maturities, immediately reducing liquidity exposure and providing more flexibility to MVC and the company in connection with the use of surplus cash while it remains under the finance agreement.

Unfortunately, we cannot yet disclose the full proposed terms and conditions being discussed with other lenders, but the obvious variables from the discussions are a longer-term and a different amortization schedule. Discussions are progressing well with the lenders, following a very similar process of discussion and approvals as would occurred with the Phase 1 and Phase 2 loans. The end goal is to combine the 2 existing loans into a new loan essentially for the same amount but with a different longer-term and a more flexible repayment schedule. All other conditions are expecting to remain the same as we have in the existing loans and we currently expect to close this transaction in the current quarter.

Rob and I will now take questions from call participants.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question is from Joseph Reagor from Las Vegas.

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Joseph George Reagor, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [2]

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I guess first thing for Aurora. Looking at the balance sheet, the receivables balance is much lower than it has been in the last 5-plus quarters. Any reason for that? Do you think you can keep it down at that level? Or should we expect a rebound there?

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Aurora G. Davidson, Amerigo Resources Ltd. - Executive VP & CFO [3]

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A significant portion of the receivables has to do with our mark-to-market adjustments on copper prices for 3 months. We received most of our receivables within the month or the following week of deliveries that we have to adjust for changes in copper price. So when there's an uptick in the copper price, you'll see a higher level. So the answer to you is, hopefully you'll see a higher level of receivables from September 30.

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Joseph George Reagor, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [4]

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Okay. Fair enough. And then looking at the revenue, you guys reported revenue tends to kind of get all over the place not just the pricing adjustments but the number of other factors. And it seems like royalties and smelting charges were a higher percent of the revenue -- the base revenue number than normal. Can you talk a little bit more about what might have driven that?

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Aurora G. Davidson, Amerigo Resources Ltd. - Executive VP & CFO [5]

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Settlement -- sorry, smelter and refinery costs are lower this year than last year, so there shouldn't be any adjustment. The numbers are all affected by settlement adjustment. So we're trying to disclose that more clearly on our notes to the financial statement by including the line of adjustments deferred value in settlement receivables. But there shouldn't be any variables other than the fact that sometimes production and deliveries change from quarter-to-quarter and that has an effect on the computation of both royalties and smelter and refinery costs. As Rob mentioned, the lower the copper price, the lower the royalty factor. So it's very hard to have linear relationships between those items, but in general term, TCRCs are lower this year and we've always been affected by higher or lower royalty factors based on copper price.

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Joseph George Reagor, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [6]

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Okay. And then on the 1,200 ton per day processing of slag, just looking for a little bit more info there. How does your revenue work on that? Do you get paid on the copper you get out of it? Or is it a flat fee? When is it going to begin? You said 6 months of total time, but like what's the exact timing? And then will that be reported like separate from tailings or as part of tailings for your total copper production?

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Robert Duncan Henderson, Amerigo Resources Ltd. - President & CEO [7]

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Joe, it's -- so we've been talking to El Teniente for some time. We've done a lot of tests in material, and they gave us the green light yesterday to go So we do expect to start in August. Our mills are already. We have a set of flotations, all available, and it's going to be a fee per ton processed. In terms of how we conferred, I think it's going to be very similar to what we did with Maricunga a couple of years ago with the total treatments, and it will be separately listed.

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Aurora G. Davidson, Amerigo Resources Ltd. - Executive VP & CFO [8]

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Yes. It will not be included as gross value of copper produced. We'll have a separate line just as we have for moly revenue that we will call tolling revenue -- slag tolling revenue or something to that effect.

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Joseph George Reagor, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [9]

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Okay. And then with the maintaining of the guidance then, will you be counting the copper production from this against guidance? Or are you to get the guidance without this 1,200 tons per day availability at the mill, just trying to understand that?

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Robert Duncan Henderson, Amerigo Resources Ltd. - President & CEO [10]

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So -- yes, the 70 to 75 includes the slag copper that was going to be produced.

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Operator [11]

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(Operator Instructions) The next question is from John Polcari from New York.

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John Polcari, [12]

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Good job on a difficult environment. Two questions. Basically, I was looking at the debt reduction and perhaps I'm picking up the wrong number because the debt reduction was a little over $8 million, Aurora?

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Aurora G. Davidson, Amerigo Resources Ltd. - Executive VP & CFO [13]

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It was. And there was -- the recent issue has been $11.25 million plus interest. The bank didn't process part of their withdrawals on time on June 30. So we had about $3.2 million of debt repayment, including interest that went through on July 2, once they returned from the weekend. That was a bank processing error.

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John Polcari, [14]

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So the current balance is...

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Aurora G. Davidson, Amerigo Resources Ltd. - Executive VP & CFO [15]

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The current debt balance is $56.2 million.

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John Polcari, [16]

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Right. And I'm picking -- this might be wrong. I'm picking up for the prior quarter from Bloomberg $75.8 million, which...

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Aurora G. Davidson, Amerigo Resources Ltd. - Executive VP & CFO [17]

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That's wrong. I don't know -- yes, they're not updated.

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John Polcari, [18]

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Okay. That answers that. What is the expiration of the labor contract? I believe, it's this October, is it?

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Aurora G. Davidson, Amerigo Resources Ltd. - Executive VP & CFO [19]

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October 16 of this year.

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John Polcari, [20]

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And that was a 4-year contract?

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Aurora G. Davidson, Amerigo Resources Ltd. - Executive VP & CFO [21]

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It was a 3-year contract because those are the new provisions under the new Chilean Labor Law. They used to be 5 years. Since we renewed 3 years ago, we're renewing on a 3-year basis.

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John Polcari, [22]

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So the new one will be the same term, has negotiations started for renewable of the contract?

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Aurora G. Davidson, Amerigo Resources Ltd. - Executive VP & CFO [23]

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They are starting according to law 2 months ahead of the expiry date. So they will start next week.

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John Polcari, [24]

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Next week, okay. And historically, we've all had acceptable labor relations, correct?

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Robert Duncan Henderson, Amerigo Resources Ltd. - President & CEO [25]

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No. We've got -- we do have good labor relations and people enjoy working at MVC. We have very long-term employees there. But having said that, 3 years ago, we did have a 10-day strike. So the unions in Chile are still pretty active, and they had been asking for signing bonuses. So we're not -- we are being very careful in telling them that, look, the copper price is low. We've been strict financially right now. So everyone down there has a good understanding of the situation, but that's not necessarily logic that we won't have an easily settlement. We know we are going in prepared in this discussion with the unions.

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John Polcari, [26]

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The prior contract had a modest signing bonus also I believe. Am I correct?

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Robert Duncan Henderson, Amerigo Resources Ltd. - President & CEO [27]

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It did, it did. We settled with a starting bonus as most companies have done in Chile.

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John Polcari, [28]

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And last question was on the power agreement, just to refresh my memory. I know it's a rather long-term agreement now. What's the expiration again on the power agreement?

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Aurora G. Davidson, Amerigo Resources Ltd. - Executive VP & CFO [29]

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It's 2037, maybe 2027...

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Robert Duncan Henderson, Amerigo Resources Ltd. - President & CEO [30]

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'32 or '37. So we still got quite a ways to go on it.

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John Polcari, [31]

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It's -- right, it's more than a decade?

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Robert Duncan Henderson, Amerigo Resources Ltd. - President & CEO [32]

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Correct.

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John Polcari, [33]

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And it covers what percentage of the total power needs?

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Robert Duncan Henderson, Amerigo Resources Ltd. - President & CEO [34]

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100%, all of it.

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Aurora G. Davidson, Amerigo Resources Ltd. - Executive VP & CFO [35]

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It's 2032.

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Robert Duncan Henderson, Amerigo Resources Ltd. - President & CEO [36]

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2032.

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John Polcari, [37]

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And is at a fix rate, I believe, or...

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Robert Duncan Henderson, Amerigo Resources Ltd. - President & CEO [38]

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It is. It's indexed to U.S. inflation. So it's essentially a fixed rate, but it is -- we can sleep at night not worrying about spikes in the park like it had done in the past.

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John Polcari, [39]

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Right. And that is, I believe, at a low level of $0.09 or $0.10 a kilowatt or something like that?

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Robert Duncan Henderson, Amerigo Resources Ltd. - President & CEO [40]

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Correct.

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John Polcari, [41]

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Okay. And lastly, would you say you had -- you feel optimistic about closing the new financing by the end of the quarter? Do you think it's at least a 50-50 chance that you'll restructure successfully?

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Aurora G. Davidson, Amerigo Resources Ltd. - Executive VP & CFO [42]

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We are optimistic.

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Operator [43]

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The next question is from Joseph Reagor from Las Vegas.

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Joseph George Reagor, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [44]

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Just had a quick follow-up on the tolling. I'm sure you can't disclose how much you're charging per ton, but can you give us an idea how many tons per day you guys were doing under the prior contract a couple of years ago?

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Robert Duncan Henderson, Amerigo Resources Ltd. - President & CEO [45]

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The prior contract with Maricunga was a little bit different and that we -- they delivered copper concentrate to us, which we blended with our copper concentrate. So the processing cost was relatively small. At this time what we have to do is, when we get the slag, we put it in the mill, we grind it and we produce the floatation concentrate. So the charges per ton are a lot higher than what we had in Maricunga one, but it is a charge per ton that's independent of copper price. So we're getting the revenue for every ton we process. So it is like a guaranteed form of income.

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Joseph George Reagor, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [46]

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Okay. So I shouldn't use the old contract as an indication of what this one might generate in revenue? And is it fair to assume standard kind of toll milling margins that I see across the industry of 20% to 40%?

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Robert Duncan Henderson, Amerigo Resources Ltd. - President & CEO [47]

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It's -- yes. I mean we're not -- when you talk about percent, again we're talking about a charge per ton here. So the copper content has not a lot to do with it, and we've estimated what the costs are. And we've got a reasonable margin on those costs. So it's really not related to the copper content at all, it's more a margin on the tons, so it's probably not typical to what you would read anywhere else. Let me add, there have been other contracts in Chile and being a very similar this toll treating slag had been done at other facilities, so you might find other examples out there.

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Operator [48]

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The next question is from Nick Toor from Las Vegas.

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Nauman Toor, [49]

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Couple of quick questions. So if you can refresh my memory, at current copper prices of $2.60 and your full production guidance of around 80,000, what kind of EBITDA and cash flow do you guys generate?

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Robert Duncan Henderson, Amerigo Resources Ltd. - President & CEO [50]

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Nick, it's Rob. The curves are complicated, and we do have it in our copper presentation because as the copper prices go down, our raw materials goes down. So right now the -- what we have is our cash costs in the order of about $1.65. At $2.60 copper price, our royalty is in the order of $0.53. So the $2.65 plus the $1.63 takes us -- sorry, the $1.65 plus $0.53 is in order of $2.15, $2.18. So that covers all our base costs. So anything above the $2.18, you're talking of free cash flow at MVC. Some of that needs to go to debt repayment. Corporate G&A is about $0.05 a pound. Sustaining CapEx is about $0.05 a pound. So you're talking $2.30 to cover all the base costs with the bank on top of that. So as long as the copper price is roundabout where it is right now, we can cover the bank, we can cover our sustaining G&A, we can cover everything else. So the free cash flow ability of MVC is still pretty good, but we do have to consider our bank debt, and that's why we've been in discussions with Scotiabank in order to decrease some of that load to give us a bit more flexibility with that cash flow from MVC.

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Nauman Toor, [51]

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Right. Now that makes sense. And -- but I guess, based on your -- based on sort of the current sort of what some might call a draft copper price, you're basically trading at 5x free cash flow or roughly a 20% free cash flow to equity roughly around 4x EBITDA.

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Robert Duncan Henderson, Amerigo Resources Ltd. - President & CEO [52]

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I know. The company is very undervalued compared to the fundamentals and that is a cause for concern.

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Nauman Toor, [53]

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Yes. And I guess your debt-to-EBITDA would roughly be less than 2x with this refinancing. So I mean that seems like sort of a no-brainer financing to me at least until unless there -- I mean especially in this environment, this should be like a glare-up. But in terms of addressing your stock price, do you have some ideas on what the management can do other than execution to bring the value of the stock closer to fair value, which is many multiples of where it's trading at compared to the comparable companies, especially considering that you don't have any of the risk associated with mining and your CapEx is quite low?

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Robert Duncan Henderson, Amerigo Resources Ltd. - President & CEO [54]

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Correct. So yes, I mean we are a pure play on the copper price. So as we said before, as the copper price goes up, and I've seen it in the past that it's going to take about $3 a pound copper price, we do intend to start paying dividends. Share buyback has also been talked about, and I think we would start doing that pretty soon as well. So when we do have the excess free cash flow when copper price goes up, that is what we intend to do to increase the share price of both dividends and share buyback.

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Nauman Toor, [55]

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Okay. Fair enough. And I think just one suggestion I would have is that you point out to people that you are at sort of draft copper prices yielding 20% on your equity with a 5x multiple, 4x EBITDA multiple and how that compares to the comp who are at these copper prices trading at insane valuations. Last question, do you -- at these copper prices, what percentage of the industry is sort of under water?

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Robert Duncan Henderson, Amerigo Resources Ltd. - President & CEO [56]

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That's a good question. Certainly, there are a lot of guys on the margin, smaller producers who are underwater right now and closing down. Glencore in Congo has shut down their nickel-copper mine. There are smaller producers in Chile shutting down. So as a percentage, I would say, it's a percentage in terms of copper tonnage. It's still pretty low, but in terms of a number of companies, I would say, it's getting quite high because the big guys, the Rio Tintos and the Codelcos of the world have very good large assets with pretty low costs. So they can carry on going until quite a low copper price. But it's the smaller companies who are exposed to copper, they are suffering right now, and I would certainly expect to see closures at today's copper price.

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Nauman Toor, [57]

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Yes. I mean I guess even if it's like 2% or 3% of the copper production, I mean already the copper market is in deficit this year and expected to be in deficit next year. So even if it goes down 2% or 3% because of these closures, I mean the -- is that sort of in the numbers when people talk about what the deficit is going to be? Or people still think that, that is the reason of closures?

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Robert Duncan Henderson, Amerigo Resources Ltd. - President & CEO [58]

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I don't believe this. I mean -- yes, Wood Mackenzie's last quote certainly didn't foresee a $2.60 copper price, and I don't think it was factored in that would be drop some production over and above what they're seeing right now. So I think the drop in copper price is going to exacerbate the deficit for sure. It's again, I think -- as we've seen in the past, the MVC has been going for 27 years. They survived low copper prices, and we just have to go through this cycle. And the answer to low copper prices is low copper prices.

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Nauman Toor, [59]

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Yes. I guess you're not just going through it, you're generating quite a bit of free cash flow more than...

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Robert Duncan Henderson, Amerigo Resources Ltd. - President & CEO [60]

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Correct, absolutely

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Nauman Toor, [61]

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But I guess the question would be, do you think -- considering the emphasis on deficit and the copper demand seems to be quite steady. In fact, China actually increased substantially their imports of copper in the last quarter. Do you think that these mines that are in trouble are liquidating their inventories, which is driving this copper price lower, especially considering that the LME inventory levels are at way below trend and globally the inventory levels are quite low?

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Robert Duncan Henderson, Amerigo Resources Ltd. - President & CEO [62]

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That's an interesting concept, but I think, typically, small mines would have sold every bit of copper they had in the last 6 months. So I don't think they had large inventories of copper waiting. I think they've been scarping the barrel for some time. And when they close, it's just going to be with a whimper, not a bang.

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Operator [63]

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The next question is from Jason Nelson from Washington.

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Jason Nelson, [64]

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Just a follow-up to Nick's question and your commentary about the cash costs of operations. I thought initially when you guys began forecasting in -- kind of in the low- to mid-80s million pounds per year that the cash cost of production was going to be more in line with about $1.40. And I think you just told Nick, it was more like $1.60. And if it's -- one, is there a change to production costs that we should be noted at this time? And then two, if not, then your true all-in sustaining costs then before interest costs from financing that currently exist and taxes is more like something just over $2 a pound if we use $1.40, which I believe was the guidance earlier in the year. Am I off somewhere?

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Robert Duncan Henderson, Amerigo Resources Ltd. - President & CEO [65]

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The $2.60 is what we expect for this year, and that's primarily because we...

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Aurora G. Davidson, Amerigo Resources Ltd. - Executive VP & CFO [66]

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$1.60.

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Robert Duncan Henderson, Amerigo Resources Ltd. - President & CEO [67]

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Sorry, the $1.60. $1.65 is based on...

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Jason Nelson, [68]

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Sure. But this year is kind of a massive year. I think I'm trying to add is on a go-forward basis.

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Robert Duncan Henderson, Amerigo Resources Ltd. - President & CEO [69]

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Yes. Exactly. So we do expect to get back down to where we want to be. So the number for this year is artificially high because of our disastrous first half of the year. Cash costs have been a lot higher than what we had expected. So we do expect cash costs on a monthly basis to go back down, and the $1.65 is an average for the year, which includes the horrible first half.

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Jason Nelson, [70]

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Sure. Yes. I think I just wanted to make sure that -- just in case there's any confusion either on the line or -- in fact, on a go-forward basis, give or take $0.05 or something, it should be -- and without contemplating the new potential labor contract next year, $1.40 a pound is still kind of the target production cost.

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Robert Duncan Henderson, Amerigo Resources Ltd. - President & CEO [71]

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That is correct.

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Aurora G. Davidson, Amerigo Resources Ltd. - Executive VP & CFO [72]

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Yes. But the labor contract is not next year. It's this year, Jason.

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Robert Duncan Henderson, Amerigo Resources Ltd. - President & CEO [73]

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Right.

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Operator [74]

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The next question is from John Polcari from New York.

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John Polcari, [75]

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One quick follow-up question. Would that be correct in assuming that the new finance agreement would allow for dividends from the initiation of the agreement if the copper price was at the right threshold? Or would there have to be a certain amount of amortization first?

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Aurora G. Davidson, Amerigo Resources Ltd. - Executive VP & CFO [76]

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John, we are trying to preserve all of the existing terms and conditions in our current agreement. It's not tied up to copper price, it's basically tied up to a debt service coverage ratio. So it would basically remain the same as what we currently have in the existing agreement.

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Operator [77]

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(Operator Instructions) The next question is from [Andrew Swan] from Texas.]

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Unidentified Analyst, [78]

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I'd like to try to get a little more color on the labor contract, the idea of getting back to $1.40 on the cash cost. In other words, where do you see the labor contract assuming that you are going to have to do some increase and some signing bonus? How much could that affect that price?

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Robert Duncan Henderson, Amerigo Resources Ltd. - President & CEO [79]

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Yes. That, we obviously have to speculate, Andrew. We -- the negotiation is going to start next week. We have seen a precedent before in Chile that there will be a signing bonus, so we do expect a signing bonus. The magnitude of it, we really don't know. So it truly is an unknown to try and speculate on what the impact on cash cost is, and I can't do it. I'd know what the answer is.

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Aurora G. Davidson, Amerigo Resources Ltd. - Executive VP & CFO [80]

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And any impact would just be on the quarter in which the agreement is reached because irrespective of when it's paid, it has to be booked as a labor cost in the period in which the agreement is entered into. So it would be affecting this year, and it wouldn't have any long-term implication.

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Robert Duncan Henderson, Amerigo Resources Ltd. - President & CEO [81]

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It would be a one-off signing bonus, which we would see in the quarter.

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Unidentified Analyst, [82]

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But do you think the wages will stay the same? Or will there be an increase in wages going forward?

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Robert Duncan Henderson, Amerigo Resources Ltd. - President & CEO [83]

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There normally is a small increase, but nothing more than we would typically project. There would be a normal small increase in wages, but the biggest number is by far the signing bonus, and that's the most unknown.

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Unidentified Analyst, [84]

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Okay. And I guess what I'm trying to get out though is, like, of that $1.40, what percentage of that is labor? And if the labor goes up 5% or, I mean in other words, is that a big deal or something...

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Aurora G. Davidson, Amerigo Resources Ltd. - Executive VP & CFO [85]

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Yes. It is not. The last labor signing bonus that we had in October 2016 had a marginal impact on cost in that quarter. We expect to reach something similar to that this year. As Rob said, we cannot speculate as to the quantum of that bonus, but we are cautiously optimistic that it will not have a substantial impact on labor costs in Q3 -- Q4 when we enter into that agreement.

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Unidentified Analyst, [86]

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Okay. Well, that's good. And then back to the renegotiations of the debt, and you think you can, hopefully, get that done in this quarter?

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Aurora G. Davidson, Amerigo Resources Ltd. - Executive VP & CFO [87]

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In the current quarter, in Q3.

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Unidentified Analyst, [88]

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Right. Because that would -- with what's going on in the world with all the negative interest rates and whatnot, the sooner the better.

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Aurora G. Davidson, Amerigo Resources Ltd. - Executive VP & CFO [89]

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It's a good time to do that.

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Operator [90]

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There are no further questions registered at this time. I would like to turn the meeting back over to Ms. Davidson.

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Aurora G. Davidson, Amerigo Resources Ltd. - Executive VP & CFO [91]

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Thank you very much. We thank the participants of the call for your continued interest and support of Amerigo. And we look forward to sharing better news with you on our conference call for Q3 of this year.

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Operator [92]

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