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Edited Transcript of ARG.TO earnings conference call or presentation 7-Nov-19 7:00pm GMT

Q3 2019 Amerigo Resources Ltd Earnings Call

Vancouver Nov 27, 2019 (Thomson StreetEvents) -- Edited Transcript of Amerigo Resources Ltd earnings conference call or presentation Thursday, November 7, 2019 at 7:00:00pm 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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* John Charles Tumazos

John Tumazos Very Independent Research, LLC - President and CEO

* Joseph George Reagor

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

* Nauman Toor

* Stephen Ottridge

* Terry Fisher

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Presentation

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Operator [1]

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Good day, ladies and gentlemen. Welcome to the Q3 2019 Investor Call.

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

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

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Thank you very much. Welcome to the Third Quarter 2019 Investor Conference Call of Amerigo Resources. I am 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 and achievements to be materially different from such forecasts and projections.

Therefore, also, 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 November 6, 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 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 during 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 the call. We are talking to you today from MVC in Chile and the situation there at the mine is business as usual. The atmosphere is calm. But as many of you know, Chile has been rocked by recent demonstrations and strict protests, primarily in Santiago. However, we believe that cooler heads will prevail and [government] discussions are currently underway to resolve the situation. We are happy to report continued positive support from our stakeholders.

The union at MVC recently signed a 3-year labor contract. Our lenders have reduced MVC semiannual principal payments and El Teniente delivering smelter slag to MVC for toll processing. The low copper price remains the single largest negative factor affecting our business. The reported copper price for the quarter was $2.62 per pound. This quarterly price is the lowest received by MVC since 2016. We continue to believe that the fundamentals for copper remain positive, with lower future supply, driven by supply side under investments. This is despite short-term demand concerns related to the global trade war.

At today's copper price of $2.65 a pound, we expect to generate sufficient operating cash flow to meet all our current liabilities. And in part, this is due to the fact that MVC's royalty obligations to El Teniente decreased with the decrease in copper price. And now our semiannual debt payments are much lower than before. Amerigo's earnings for the third quarter of 2019 were negative $2.1 million, and the company generated cash flow of $3 million from operations.

Copper production, including slag toll processing, was a quarterly record at 19.1 million pounds and molybdenum production was 0.5 million pounds. The copper production included 11.1 million pounds from Cauquenes, 5 million pounds from fresh tailings. MVC started to process the El Teniente slag in mid-August 2019 and we gained an unbudgeted 3 million pounds of copper in the quarter. We are now doing about that amount every month, and MVC expects to continue processing slag into the first quarter of 2020.

The cash cost for Q3 was $1.56 a pound, which is a big improvement on Q2's cash cost of $1.97, and we are maintaining our 2019 guidance of 70 million to 75 million pounds of copper at a cash cost of $1.60 to $1.75 per pound. The quality of material from Cauquenes has improved and grade and recovery are significantly higher than the previous 2 quarters. But the plant at MVC is still not performing at its best and recovery is lower than originally projected. MVC had recently completed a detailed plant audit and have identified areas for improvement. The CapEx-light projects, such as changes in plant configurations will be completed this year. However, the one big factor that is affecting recovery is the shortage of water. Here and in the province to the city of Rancagua, we are currently experiencing the worst drought in 60 years, an annual rain fall year-to-date is less than the half of prior years.

This means that there is less water available than necessary to run the plants equipment such as cyclones and flotation cells at their optimal efficiency. MVC have identified a project that will significantly increase the quantity of internal water recycled from its existing thickeners, however, this will require a $2 million investment and 6 months to install, which would form part of our normal sustaining CapEx budgets, which, by the way, does not require more investment in the new Cauquenes sump next year as the current sumps are more than sufficient.

I'll now hand you over to Aurora to discuss the details of the financials.

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

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Thank you, Rob. We're pleased to present the third quarter of 2019 from MVC in Chile. The third quarter marked improvement in production and financial results when compared to quarters 1 and 2 of the year. Rob has provided the highlights from production materials already. In terms of financial results, Amerigo posted a net loss of $2.1 million in the quarter, down from a net loss of $6.6 million in the preceding quarter. The single main factor driving the Q3 net loss was a $1.6 million loss on modification of debt posted under international financial reporting standards. Normalized loss without this item would have been $600,000. Loss per share in the quarter was $0.01. Rob already mentioned that copper price continues to be the challenge affecting the company's financial performance. Amerigo's copper product in Q3 was $2.62 per pound compared to today's price of $2.69 per pound, but a lower quarterly price of Q1 over Q2.

And the price resulted in gross copper sales of $43.6 million and negative settlement adjustments to prior quarter sales of $875,000. As items deduct from revenue, we had $8.8 million royalties to El Teniente, smelting and refinery cost of $5.4 million and transportation costs of $512,000, resulting in net copper revenue of $28.1 million. The company also had a molybdenum revenue of $4.4 million and slag processing revenue of $1.4 million for total revenue in Q3 of $33.9 million. Total production and tolling costs, including depreciation, were $33.9 million. The company's cash cost was down to $1.56 in Q3 compared to $1.97 in Q2 and $2.03 in Q1 of this year.

Other general and administrative expenses were [$826,000] and regains were $761,000. Finance expense in this quarter was $3.6 million, higher than our normal quarterly finance costs as a result of 2 items. The first one was the loss on modification of debt, as I have alluded to already, of $1.6 million, which is a noncash item. And there was also the unwinding of an interest rate swap associated with MVC's corporate debt and mark-to-market adjustments to the new interest rate swap taken with a debt refinance in the amount of $836,000, of which $300,000 were a natural cash outlay. The company posted an income tax recovered of $624,000 and a net loss of $2.1 million.

In respect of cash flow in the quarter, cash generated from operations was $3 million, and after changes in working capital, net cash from operations was $1.3 million. Use of cash in the quarter included $4.2 million used in investing activities, [including] the borrowings of $2.7 million from debt principal payable on June 30, that's processed by the bank of the first banking day of July and a $1.1 million paid in transaction fees associated with MVC's debt refinance. Ending cash at September 30 was $1.6 million. From the information presented above, the single most significant item to note was the MVC's debt refinanced. I should note that no additional funds were borrowed. The total amount owed to our lenders remain unchanged at $56.3 million. The refinance has 3 major components, an expansion of terms from December

(technical difficulty)

September 2023. A change in the structure of repayment from semiannual payments of $11.3 million each to 7 semiannual payments of $4.7 million and a final payment of $23.5 million on September 2023. And a reduction of interest rate, including locking 80% of the debt's interest through an interest rate swap. The debt refinance provides us with needed flexibility under current copper price constraints and continues to provide MVC with the ability to make anticipated debt payments under the right conditions, should these arise in the near term.

Another item to note on this call, although it occurred subsequent to quarter end, with MVC successfully locking in a 3-year collective agreement with its 208 member union, a unique feature in Chile in signing of collective agreements union demand a payment as a signing bonus, which is not of an insignificant amount. For MVC, the total cost of the signing bonuses was approximately $2.2 million paid in 2 equal installments on October 2019 and March 2020, (technical difficulty) very initial to it.

The full amount of the volumes will be recognizes to the labor cost in Q4 2019, irrespective of the time of payment. MVC signed this labor agreement at the time when a number of mining operations in Chile went into labor strike precisely in this agreement over signing bonuses. Operations and results in Q4 continued in line with expectations and guidance. We will report year-end financial results mid-February 2020. And in the meantime, we want to thank you for your continued interest in the company during this year.

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) The 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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All right. So you mentioned the plant recoveries haven't been what were expected for Cauquenes since the expansion. I think the original expectation was something in line with maybe like 45%. Is that right?

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

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Yes, it was in the high 40s.

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

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Okay. And if you fix this water issue, do you think that will get you back to that? Or do you think based on everything you've experienced so far, maybe the reality is more in the low 40s?

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Robert Duncan Henderson, Amerigo Resources Ltd. - President & CEO [5]

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Yes, we've been surprised too many times by recovery to make bold predictions, but we did have a very good meeting with all the metallurgists and consultants, and we've identified about 5 or 6 areas where the data shows we can improve. The water alone, so as we can get up to about 4 or 5 percentage points on Cauquenes. So water will get us halfway there. And the other ones are going to be on top of that. We may not get back up to the high 40s, but I'm optimistic we're going to get back a significant amount that we've lost.

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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 long-term processing in grades. What do you guys think the annual operating rate from Cauquenes can get up to, obviously, this year has fallen a little short of expectations. And then, obviously, the grade, at least in the first 2 quarters was weaker than expected, but it recovered quite a bit there in the third. Is that -- do you think you can stay at that 0.27% going forward? Or what's the thoughts there?

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

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Certainly, in the short term, we're in the middle of doing a big drill hole analysis. So when we did the study, we basically had inferred resources based on 30 holes. We've increased that to over 80 holes, so we've got a lot more information. But that's still good information is still being processed. So we're not really yet to issue a new long-term mine plan. But I think recovery, we will get more kind of clarity on it in the next 6 months. I think that's going to be the biggest factor, which determines our long-term production arrangement.

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Joseph George Reagor, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [8]

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Okay. But -- how about on a just a tonnage basis. What do you think -- what was the planned annual tonnage...

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Robert Duncan Henderson, Amerigo Resources Ltd. - President & CEO [9]

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Tonnage is the easiest part. So we know tonnage -- we've maintained tonnage. We haven't lost any reserve tonnage. The tonnage per month is bang on targets. We're running at 62,500. So tonnage is the easiest part of the equation. Grades, we're going to get a little bit more information when we've completed all the drill holes. But I don't think we're going to see huge deviations in grade, it may be a little bit softer, but recovery [as sole] remains the biggest unknown. We've identified areas for opportunity. But they're yet to be fully baked yet to give an accurate prediction on what future areas is going to be.

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Joseph George Reagor, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [10]

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Okay, fair enough and then maybe...

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Robert Duncan Henderson, Amerigo Resources Ltd. - President & CEO [11]

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Although we have identified a lot of areas that are currently showing to be deficient, and we think we can fix that.

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Joseph George Reagor, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [12]

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Okay. And then final one, just for Aurora, cash balance was a little light at the end of the quarter, but receivables were back up, right?

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

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Absolutely. Yes. I think we had a timing issue there. It's not a timing issue, it's a timing reality of when you get payments per quarter and still usually fall or don't necessarily fall on the day in which you get your payments. For me it was -- we actually we had 2 major invoices paid the day after. So it's a shame that couldn't get through to us on September 30, to show a better picture. But as you mentioned correctly, we had a healthy balance of receivables that have all been realized by now and our cash balance will certainly improve at quarter end.

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Joseph George Reagor, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [14]

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Okay. So definitely no tightness there since early in the quarter.

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

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Not as -- nothing tightening then shown at September 30. No, we are building up cash, and we have to fund our debt services account by December. So there is certainly an expectation of reported cash being substantially stronger than September 30 at year-end.

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Operator [16]

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Next question is from Stephen Ottridge of Vancouver.

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Stephen Ottridge, [17]

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Question. Does the smelter slag that you were processing come from the smelter that MVC delivers its concentrate to?

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Robert Duncan Henderson, Amerigo Resources Ltd. - President & CEO [18]

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It does not -- it comes from the El Teniente smelter, which is just down the road. Our concentrate goes to other smelters, Cauquenes and even as far as China. The El Teniente smelter basically treats all of Cauquenes material. And with the new environmental regulations down there, they had to change their smelting process. And that significantly increased the grade of their slag. So that's why there is value in processing their slag right now.

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Stephen Ottridge, [19]

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So -- will they not have slag continue to build as they process, and perhaps, will get in the future their process...

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Robert Duncan Henderson, Amerigo Resources Ltd. - President & CEO [20]

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It will. Correct. So (inaudible) recognized this and started building a plant some time ago. That plant has been seriously delayed. So they not only have big stockpile of slag, which needs [processing]. So that's what we're doing for them right now. And the plant is expected to start sometime next year, but we're expecting to carry on processing their slag well into Q1 next year.

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Stephen Ottridge, [21]

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Okay. Now I've got a question on the sumps, you -- when you -- your first sump had low-quality material. And now you've got the new sump has been going, what, since the middle of July. Is -- are you still producing material from the old sump? And if so, does that continue into the future for any length of time?

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Robert Duncan Henderson, Amerigo Resources Ltd. - President & CEO [22]

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Yes. So the old sump is gone. The old sump was about 30 meters down. The new sump is now right at the bottom of the deposit. So the sump that's currently there will continue processing material, the deep material for the next 12 to 18 months. But of course, when -- you can't just take stuff from the bottom because we -- getting the stuff from the top is going to slide down as well. So we are going to continue seeing a mixture of material coming into the mill, but we do have access to the good stuff at the bottom of the deposit, whereas previously, we did not.

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Stephen Ottridge, [23]

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Okay. So you'll have to build or construct or start working on a new sump in about 12, 18 months' time, I guess, is what you're saying?

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Robert Duncan Henderson, Amerigo Resources Ltd. - President & CEO [24]

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Yes. It will be in 2021.

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Stephen Ottridge, [25]

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Okay. I think I know the answer, but there's no DET royalties left in arrears, is there? You paid them all off.

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Aurora G. Davidson, Amerigo Resources Ltd. - Executive VP & CFO [26]

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Well, there'll always be a few royalties in arrears because we basically paid them -- it's 3 months plus a few weeks, so basically, 4 months of payable so as shown the balance sheet. We actually have a specific line called (inaudible) royalties payouts.

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Stephen Ottridge, [27]

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Okay. So it is only...

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Aurora G. Davidson, Amerigo Resources Ltd. - Executive VP & CFO [28]

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It's just a normal. It's just a normal cycle. So we don't have any royalties that have fallen off that contractual payment schedule with them. If that's what you mean?

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Robert Duncan Henderson, Amerigo Resources Ltd. - President & CEO [29]

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Yes. It's business as usual.

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Operator [30]

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The next question is from Nick Toor of Las Vegas.

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Nauman Toor, [31]

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Could you give me a little bit of color on your path to optimization. I know you said it's going to take roughly 5, 6 months. Could you sort of give a little bit of color on what are the discrete elements you're focusing on? What is your level of confidence on whether that solves the issue? And how much of this optimization is due to the water issue that might just be transitory, if we get a normal season next year?

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

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Thanks for the question. We've had 4 different consultants, plus all the MVC metallurgists and myself in a room. So we've had 10 metallurgists all discussing what they think is the issue. And of course, there are many issues. It's not just one. But fundamentally, we had a plant -- the new plant is not being fully utilized. So for whatever reason, it's not fully recovering all the copper, it was designed to. So what that means is that we have plant capacity that's not being fully used. And we have other parts of the plant that are being severely stressed because of circulating loads and metallurgical issues. So the discussions have been on -- we've agreed CapEx-light options of circuits configurations. Instead of sending material to one bunch of cells, we send it to another bunch of cells.

And so there are a number of ways you can configure the circuit. So we've discussed which parts are being stressed and which part are being underutilized. And how can we get a better overall utilization of the plant. So there must be about 4 or 5 or even 6 initiatives that don't involve CapEx. There are simply piping changes that will alleviate the stressed areas and full to capacity, the unstressed areas. So those we are implementing as we speak. And we expect to have those all done by year-end. And the magnitude, again, we're kind of speculating here, but I would -- we're thinking on the order of 4% to 5% recovery increase. The big one is the water. Now the area has experienced a drought, so we're not getting as much water from El Teniente and their tailings.

We are limited now at water, we can recycle back to the plant because although we have retained thickeners, which will recover the water, it gets pumped up to the plant in a single pipeline, and that pipeline is 100% full right now. So in order to get more water to the plant, we'd have to build another pipeline, and that's going to take the time and the money. But it will deliver significant quantities of water to the plant, which, again, I think, and tests have demonstrated that we can get another 5% increase in recovery there. So I think we can get a long way just using CapEx-light programs in the short term. And in the middle of next year when we have the amount of water that we normally would have, we think we're going to get back up to -- close to where we should be.

But these are not based on hard data, they're based on 10 metallurgists combined, a ton of years of experience. So they are good projects, but trying to put a hard number as to exactly how much copper we're going to recover is impossible to do. But we're confident that we've identified more than enough potential issues that can be resolved without spending a ton of money. Ideally, we would put in the new flotation plants, and we'd put it in a new grinding mill, but that's going to cost $30 million, and we just don't have that. And we don't believe it's justified. So we are taking a CapEx-light view on how to fix these problems through circuit modification and, of course, addressing the water issue, which is a strategic one because if Chile does enter into a big drought it would threaten anything -- the ability of us to process Cauquenes at all.

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Aurora G. Davidson, Amerigo Resources Ltd. - Executive VP & CFO [33]

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That is occurring with other Chilean mines already.

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

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Exactly. I mean, the mines have shut down because there is no water. So yes, water is a big issue.

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Nauman Toor, [35]

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Got it. So the first part is really -- by the way, thank you for -- it was a very helpful color. The first part is really sort of a debottlenecking of the plant, which -- I'm not diminishing its importance but seems like a technical issue that you can hopefully resolve. The second part of rebuilding the pipeline. I know you mentioned the CapEx number, but if you could refresh my memory on that. But it seems like that is sort of an insurance policy also in case these drought conditions are more recurring so that you don't have these kind of disruptions in the future. And with this new pipeline, you will have that effectively resolved by the middle of next year. Is that correct?

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

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That is 100% correct. Yes, we're estimating it's about $2 million to put all modifications in. $2 million, yes. Sustaining CapEx is typically between $5 million or $6 million. But next year, we don't have to spend $2 million on new sumps. So we do have a little bit of room for projects such as this, which does address our water security.

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Nauman Toor, [37]

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Got it. So you'll have that same say of $5 million to $6 million of guidance you've given for maintenance CapEx and just a portion of it will go towards this pipeline?

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

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Yes. We haven't finalized the budget, yet. We expect to spend less than that. We're trying to go as lean as we can on CapEx next year.

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Nauman Toor, [39]

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Got it. And last question for Aurora. I'm just looking at your cost structure this quarter versus last year. And there are 2 big items. One, obviously, flat revenue, which [sack off] which were roughly $0.04 and then there's an inventory adjustment, which was roughly $0.11 a pound. Could you give you me a little bit of color on what that -- how that inventory adjustment works and whether this is something that was unique to this particular quarter?

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Aurora G. Davidson, Amerigo Resources Ltd. - Executive VP & CFO [40]

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Yes. I can talk about that without any problem. There are 2 components to that inventory adjustment Nick. One of them is the relationship between production and sales in a given quarter. And the other quarters of this year, we were producing more than we were selling. Q1 was one case like that, Q4 2018 was another point like that. So we had accumulated certain amount of copper in -- as concentrate [debt]. It wasn't moving on a quarterly basis at the same rate as the production. This thing has reversed in Q3.

So we had higher sales than production and that is the reason why we have this adjustment because in the same way that we had inventory those costs because we haven't sold in the prior quarters as we'd taken a lot of inventory and flowed it through the P&L when the sale occurred, that causes a recoup of those former inventory costs. So that is one part of the answer. The other part of the answer is given the low production that we had in Q1 and Q2, we were -- our inventory cost was higher on a unit basis than normal. So that's a higher cost inventory that is being flowed through the P&L. On an annual basis, our inventory adjustments neutralize. We had exactly the opposite effect that you're describing in Q1. So it's basically a reversal of the situation.

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Nauman Toor, [41]

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Got it. So what we saw in this quarter in terms of the increased costs stemming from this inventory adjustment. That seems like a 1 quarter event. And going forward, to the extent that, I guess, maybe you can answer that, going forward, do you expect that commissions were down towards normal and you wouldn't see this $0.10 or $0.11 per pound increase in your cost structure?

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

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Yes, yes. Because we've reversed most of what we had in the year, so it shouldn't be as dramatic an effect in Q4. At the end of the day, it all depends on your actual shipments on the (inaudible). We try to be as efficient as we can towards the quarter end to avoid this kind of issues. And when we don't have a substantial inventory buildup from the prior quarter, then it's all -- it's a nonevent. But in this case, we did have some inventory buildup from -- particularly, from Q1 and Q2, that has now been flowing out of inventory...

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Nauman Toor, [43]

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Got it. So if I look...

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Aurora G. Davidson, Amerigo Resources Ltd. - Executive VP & CFO [44]

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We didn't see it to the extent that we saw it in Q3.

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Nauman Toor, [45]

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Got it. Got it. Okay. So if I look at your third quarter results just on the bottom line, it is showing like a $0.01 EPS loss. But there are 2 maybe, I guess, 3 maybe sort of temporary elements that are reflected in that. One is your refinancing sort of old debt charge-off of $1.6 million. And secondly, you've got this inventory adjustment issue? And then thirdly, and maybe that's not as relevant because it's not going to resolve for another 6 months is this drought that we weren't expecting. Have you sort of looked at or can you give us what the normalized earnings would be if these 3 things had not happened. Or either one of them, which ever one you feel comfortable telling me about.

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Aurora G. Davidson, Amerigo Resources Ltd. - Executive VP & CFO [46]

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Sure. I mean this is just a very easy one. If we didn't have booked the loss on debt refinancing, our loss would have been $600,000. And we also had $800,000 of that swap adjustments, of which only $300 was cash. So we basically could have been on a neutral position without those 2 items. And on other items, you have noted that we also had the effect are the adjustments to prior quarter sales. We had $900,000 of those in Q3. Right now, the way -- if copper price continues to be at $2.69, which if the price today, we'll have possible settlement adjustments in Q4. So there will always be items that fall out of the ordinary, but if we just refer to the 2 items under finance expense that I have alluded, we basically would have had a no loss quarter.

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Operator [47]

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(Operator Instructions) Your next question comes from Terry Fisher of Toronto.

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Terry Fisher, [48]

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Yes, CIBC Private Wealth. I don't think she got the name of the company. She thought it was media. In any event, first of all, guys, thanks for building that nice website. I really like the pictures on there. I think it's really well done. It's also quite easy to navigate the site and I go on to many companies' websites, many billions of dollars larger than yours that are much more difficult to get through with very few pictures. So congratulations on that. Is that Aurora doing that or...

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Aurora G. Davidson, Amerigo Resources Ltd. - Executive VP & CFO [49]

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(inaudible)

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Terry Fisher, [50]

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That's right. All right. So my first question is on the labor agreement. In last call, we went over the front end bonus concept in detail. And Aurora has mentioned when those will be paid, and I assume they're expensed in those quarters. So one in the fourth quarter and then another one in the March quarter. But I just wanted to get a quick response on the agreement.

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Aurora G. Davidson, Amerigo Resources Ltd. - Executive VP & CFO [51]

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Okay. Let me interrupt you. We have to expense the full amount of the bonus in October. We have done that already because it's an obligation. How we structure this payment, the bonus is irrespective, we will have the full labor cost impact in Q4 2019.

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Terry Fisher, [52]

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Okay. Good to know. In fact, that's -- now you say that, that's what I remember from the last call. But what I just wanted to get a quick read on is whether or not irrespective of the settlement bonuses that the agreement itself is satisfactory to you and whether or not it bumps up the cost per ton by any -- or sorry, per pound by any appreciable amount, that -- because obviously, you can't pass it on, that's a function of copper prices. So are you happy with the settlement in regard to your cost going forward?

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Aurora G. Davidson, Amerigo Resources Ltd. - Executive VP & CFO [53]

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I think there are several ways of answering that question. It is double the amount that we paid 3 years ago, it is a fraction of what we paid 7 years ago when copper prices were higher. So compared to other bonuses being paid at the same time as ours, it was a low bonus. And I think one unique feature that I've only seen in MVC is the structuring of the payments of debt bonuses in installments. And most companies have to face the reality of an immediate cash outlay, which is -- it's troublesome, right? So it could have been worse certainly than it was, but it's not an insignificant amount for us given the current copper price environment.

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Terry Fisher, [54]

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Correct. It's -- I think it's a 3-year agreement going forward and the terms of the agreement are -- give you enough flexibility to operate and manage costs?

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Aurora G. Davidson, Amerigo Resources Ltd. - Executive VP & CFO [55]

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Absolutely.

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

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Correct.

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Terry Fisher, [57]

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Okay. So my second question is that if we look at the quarter and say, okay, what is the run rate here. The new sump wasn't in until middle of July. And I don't know whether there's a sort of a run-in period for that, but it would have impacted the quarter a little bit versus what would have been the case if it had been operating coming in right at the beginning of the quarter. So what kind of difference do you think that would make just in general terms, I know you can't put an actual number on it, but we could have seen a better quarter if it had been operating for the full period?

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

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No question, for sure. Yes. July was a tough month. The way that it worked against us. We wouldn't -- as early as we hope to be. So in July, it was a bit of a transitional month, so we really only had August and September, delivering the goods from the better quality zone...

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Terry Fisher, [59]

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Okay. So related, is that would -- Rob would that -- sorry, would that explain then, because my next question is going to be what the primary driver was for the increase in the cash costs over last year, I think last year was a pretty good quarter, but $1.38 up to $1.56 would that be because of what you just mentioned? Or is there another primary driver?

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

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The primary driver is the production not being as high as we wanted it to be. So we're processing material in the mills. We're grinding it, but we're not getting the recovery that we had projected. The shortfall in recovery and then to a shortfall in pounds -- copper, the dollar and the cent were a little bit less than last year, but the pound, speaking of winter, is good so the unit costs were driven higher primarily because production was a bit short.

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Terry Fisher, [61]

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Okay. And can I -- just 2 quick ones at the end here. One is just coming back to the slag, my sense from what you said is that once they get their plant up and operating, they're going to process their own slag, and you won't have that anymore to do in the future?

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

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That's the agreement that we have so far, there is potential that it could go on for much longer. But we're not baking that into our plans right now.

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Terry Fisher, [63]

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Okay. Final question is, well, it's 2 related questions. One is, I didn't read anywhere that El Teniente had settled any new labor agreement. I don't know whether there's a potential there for labor disruption and the other related issue is, whether or not there's with the writing and so on. I know some things had happened at ports. And I mean, if Valparaiso is an issue, for example, like I don't know where you -- where concentrates are getting shipped from and so on, but is there any potential disruption from transportation issues that would affect you or El Teniente from labor?

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Robert Duncan Henderson, Amerigo Resources Ltd. - President & CEO [64]

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El Teniente has settled their labor agreements earlier this year. So they had a 3-year agreement. So the labor is there, so we don't expect any disruptions. The situation I mentioned is very calm here, people are just going about their normal lives, restaurants are opened late. There was talk of a port blockage. But it hasn't materialized. So it's -- we haven't seen any general action by -- of that specific type. That's not to say it can't happen, but so far, it's -- it seems to be relatively calm.

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Terry Fisher, [65]

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Okay. Well, those are all my questions. But I would agree with your comments in the report that there's been underinvestment in new copper mines and grades are deteriorating, old mines are getting mined out. I think that the real key to this story is if you can just keep going, the copper price is going to [skate] everything on site.

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Robert Duncan Henderson, Amerigo Resources Ltd. - President & CEO [66]

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Yes. Mines don't last forever, and copper demand goes up every year. So sooner or later, there's going to be a day of reckoning.

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Operator [67]

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The next question is from Dave (inaudible).

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Unidentified Analyst, [68]

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Most of my questions have been answered, but I do have one about the grade of the historical tailings from El Teniente. I see, historically, it's been about 0.23% a few years back and Q3 of 2018, it was 0.259% and the latest quarter it's 0.270%. Do you expect that grade to go up with your new sump, are you expecting the 0.270% to be pretty well where it will plateau at.

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

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It goes up as high as 0.3% on a weekly or monthly basis, but the average resource for the deposit is 0.265%. So we are mining slightly above resource grade right now because we are in a very good spot in Cauquenes. We do expect grade to stay high for the near future, but in the long term, it will revert to the median point 0.265%.

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Unidentified Analyst, [70]

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Okay. So you've basically got the full benefit of the new sump with respect to grade at this point.

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

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Correct. We are literally taking stuff right from the bottom of the deposit, which was deposited on day 1 when the tailings dam was constructed, which goes back to 1937, and that's when grades were good from El Teniente. So we are taking out the very best stuff right now.

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Operator [72]

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Your next question is from John Tumazos of Holmdel.

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John Charles Tumazos, John Tumazos Very Independent Research, LLC - President and CEO [73]

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Could you give us an update on your electricity costs? And how much the civil unrest a couple of weeks ago, impacted either your operation or El Teniente or if it's even relevant because there's a 100 years' worth of tailings laying around?

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Robert Duncan Henderson, Amerigo Resources Ltd. - President & CEO [74]

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John, with respect to the power price, we've locked in 100% of our power until 2031-ish. So we do have a very long-term power contract with a fixed price for all of our power consumed. And that fixed price is in the order of USD 0.09 per kilowatt hour. So our power price does not vary with the weather, like it does in the rest of Chile, due to the drought right here, the spot price is as high as $0.14, $0.15 per kilowatt hours. We're locked in at around about USD $0.09. So we're unaffected by the drought. In terms of unrest.

We are done here. A couple of weeks ago. Yes, it was -- part of Chileans were pretty shocked at what went on, it was a big surprise. But it really -- it hasn't morphed into anything catastrophic. They are still -- downtown Santiago still has guys in the streets who are protesting. Yesterday, there were some truckers on the highway driving slowly, honking their horns, so there still is some activism going on right at the mine sites, like at El Teniente, no issues, and certainly here at MVC, no issues.

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John Charles Tumazos, John Tumazos Very Independent Research, LLC - President and CEO [75]

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So you didn't lose an hour of production?

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Robert Duncan Henderson, Amerigo Resources Ltd. - President & CEO [76]

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We did not lose anything. We had to work shifts while the curfew, but we do that anyhow so that wasn't a big deal. It is now -- there's no curfews now so we were 100% back to normal.

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John Charles Tumazos, John Tumazos Very Independent Research, LLC - President and CEO [77]

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Now your third quarter unit cost per pound compared to a year ago rose, and you described the 3 mixes of tailings. Was the average grade of the tailings higher because you had more old tailings and more smelter slag? Or were those just more expensive to process?

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Robert Duncan Henderson, Amerigo Resources Ltd. - President & CEO [78]

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The smelter slag, it doesn't enter into the computations that's calculated as a byproduct credit. So the unit costs are just for the historic and fresh tails.

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Aurora G. Davidson, Amerigo Resources Ltd. - Executive VP & CFO [79]

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Well, we do have -- we did -- [we've provided for smelter] slag revenue offset that.

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Robert Duncan Henderson, Amerigo Resources Ltd. - President & CEO [80]

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Correct, correct. So it's -- I think the difference between now and a year ago is simply because we are running more mills. We've got more equipment running. We've got the new plant operationals and more power has been drawn, but production hasn't gone as high as originally planned and that's why the unit cost is a little bit higher than what we would have liked. But then compared to last quarter, it's significantly better. Last quarter, it was awful. And we do expect it to continue to improve in Q4, we expect it to go down again. One of the effects that is helping us is the Chilean peso. It is the exchange rate, the peso to U.S. dollar is in the lowest in 15 years. So it does help some of the local costs, translating into U.S. dollars, it is a bit cheaper to operate in Chile than it was a month ago.

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Operator [81]

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Next question is from Steven (inaudible), of Philadelphia.

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Unidentified Analyst, [82]

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I have a question about the water situation. So do you get all the water basically coming down the tailings channel, put that into the plant, recycle as much as you can and pump it up to where you're extracting the tailings? Or do you also have your own sources, essentially at the plant, some sort of ponds, water supply ponds, things like that that fill up during the rainy season?

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

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Correct. We have our own sources. And so yes, the material coming down from El Teniente, we need that water to process the fresh tailings. But the historic tailings we extract with water we have in a pond. So we do expect to rainfall in a pond. And we also have access to river water, which we pump when we need it. So we do have our own supply of water, which will be used to extract Cauquenes and say, the fresh, we rely on whatever El Teniente sends us.

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Unidentified Analyst, [84]

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Okay. So just hypothetically, if the rains did come back, would you be able to immediately use that water? Or would there be some like sort of regulation on the river water, hey, it's got to come back up by 50% et cetera. I'm just wondering if there may be a way even though we're saying it's going to be 6 months until you get the pipeline that potentially this -- you could get additional water before that.

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Robert Duncan Henderson, Amerigo Resources Ltd. - President & CEO [85]

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Theoretically, yes. Practically, the next rainy season starts in June. So we are into the driest part of the year but you do have winter rainfall down here. The country gets most of its rain from June through to September. And October to May, it's typically very dry.

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Unidentified Analyst, [86]

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Okay. And then the last question is just with regards to the recoveries coming back up. When you moved the pump and you got back into the deeper part, where you were at that course material, and you didn't have the fines and the slimes and everything, was there any sort of change, though, in the composition of the tailings that might be having something to do with changing the recovery itself, or basically, it was the same stuff that was up higher, basically identical to what you were into before?

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Robert Duncan Henderson, Amerigo Resources Ltd. - President & CEO [87]

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Yes, it's the -- it's a very big area that we're mining. We're not mining from a specific little rock face. It is an immense area that we're mining. And so we are taking parts from all over. But essentially, the material we're mining now is very similar to what we were mining in Q4 last year. In Q4, we had recoveries of 44% from Cauquenes. And now we're seeing 36%, 37%. So the group of metallurgist that got together theorized those because the plants has been stressed over the last 6 to 8 months.

It's buildup big circulating loads, some parts are working well, some parts are not, some parts are stressed, some parts are underused. And that is part of the Cauquenes material. It's been in the circuit since Q4. So when they first started, everything was working pretty well. And now we're getting big [secondary] loads built up, which are stressing certain areas of the plant. So we did hit 44% in Q4 last year. So we should theoretically be at 44% at a minimum, today. So there's good expectations that we will get recovery back up again.

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Unidentified Analyst, [88]

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Right. So it's about -- okay, it's about basically the flow design, which you described earlier. I just wanted to make sure I understood correctly. It's not -- I know this didn't happen, but you didn't go from a sulfide to an oxide, all of a sudden, oh my God, none of this works anymore, this is just working out, like you said, a flow problem to get everything unstressed, it sounds like, okay.

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Robert Duncan Henderson, Amerigo Resources Ltd. - President & CEO [89]

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I think what, Nick said, debottlenecking that's probably describes what we're doing best right now. We're trying to relieve some of the stressed areas of the plant and transfer the load to unstressed areas.

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Aurora G. Davidson, Amerigo Resources Ltd. - Executive VP & CFO [90]

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Operator, do we have any more questions?

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Operator [91]

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The next question is from Stephen Ottridge of Vancouver.

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Stephen Ottridge, [92]

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Just the water situation intrigued me on this whole thing. So the tailings that come down from El Teniente. They're obviously in water, and that's enough water to run it through the whole plant. So your extra water that you're using is to move the material from Cauquenes and process it. So at the end of the day, the water that you got coming out at the back end or everything is that flowing back down the sump down to Carén?

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Robert Duncan Henderson, Amerigo Resources Ltd. - President & CEO [93]

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We have 3 very large thickeners before it goes into Carén. So we recover a lot of the water from those thickeners. We only have one pipeline going into the mill right now and that pipeline is running at a 100%. So the metallurgists have identified opportunities to recover more water from those thickeners, but we don't have the physical infrastructure in place to pump that water up to the plant. So that's (inaudible). The thickeners can recover more water internally.

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Stephen Ottridge, [94]

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So I understand that certainly. If you...

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Robert Duncan Henderson, Amerigo Resources Ltd. - President & CEO [95]

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The stuff that we send down to Carén is at the same density as El Teniente sends it to us.

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Stephen Ottridge, [96]

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Okay, okay. So if you got -- if you managed to get more water at the back end here, that water would be used to pump material from Cauquenes?

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Robert Duncan Henderson, Amerigo Resources Ltd. - President & CEO [97]

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No. It would be used to -- we have enough water there. But to run the cyclones and to run the flotation plant, we need to add water into the circuits. So we retain that water in the thickeners, but the density we get from El Teniente and the density we get from Cauquenes is too high. In order to run the equipment properly, we need to add dilution water. Now we are limited by the amount of dilution water occurs. We only have one pipeline out from the thickener we need 2 pipelines. If we get that second pipeline then we can use dilution water in the flotation cells. We can use dilution water in the cyclones and we can get much better efficiencies.

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Stephen Ottridge, [98]

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Okay. So that excess water then right now that you've got at the back end, which you -- is that -- that's going down to Carén then, you've got to get rid of it.

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Robert Duncan Henderson, Amerigo Resources Ltd. - President & CEO [99]

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No. We're using 100% of it. But what's happened is that El Teniente increased the density of material. So they're sending less water down to us. We're getting less water from El Teniente in their tailing, but to run cyclones and thickeners, we still need to have waters. We need to add more water because they're sending less to us. So they're also having water saving initiatives and sending less water with the tailings to us, but we still need to run our plants. We need to add all the recycled water that we have, which is insufficient.

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Operator [100]

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There are no further questions registered at this time. I would now like to return the meeting back over to Ms. Davidson. You may proceed.

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Aurora G. Davidson, Amerigo Resources Ltd. - Executive VP & CFO [101]

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Thank you very much, and thank you for everybody for your calls and continued interest in the company. As I mentioned earlier, we will touch back base again mid-February to report 2019 annual financial results for the company. Thank you.

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Operator [102]

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