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Edited Transcript of DGC.TO earnings conference call or presentation 28-Apr-17 2:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 Detour Gold Corp Earnings Call

TORONTO May 3, 2017 (Thomson StreetEvents) -- Edited Transcript of Detour Gold Corp earnings conference call or presentation Friday, April 28, 2017 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* James Whyte Mavor

Detour Gold Corporation - CFO

* Laurence Gaborit

Detour Gold Corporation - VP of IR

* Paul Douglas Martin

Detour Gold Corporation - CEO, President and Director

* Pierre Beaudoin

Detour Gold Corporation - COO

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Conference Call Participants

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* Anita Soni

Crédit Suisse AG, Research Division - Research Analyst

* Kerry Smith

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

* Michael Parkin

Desjardins Securities Inc., Research Division - Precious Metals Analyst

* Rahul Paul

Canaccord Genuity Limited, Research Division - Director

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Presentation

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Operator [1]

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Thank you for standing by. This is a conference operator. Welcome to the Detour Gold First Quarter 2017 Results Conference Call and Webcast. (Operator Instructions)

I would now like to turn the conference over to Laurie Gaborit, Vice President of Investor Relations. Please go ahead.

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Laurence Gaborit, Detour Gold Corporation - VP of IR [2]

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Thank you, operator, and good morning, everyone. Welcome today to Detour Gold's First Quarter 2017 Conference Call and Webcast. Paul Martin, President and CEO, will review the results. And following this, Pierre Beaudoin, our Chief Operating Officer; and James Mavor, our Chief Financial Officer, will also be available to answer questions at the end of the call.

Today's presentation is available for download both on this webcast and on the company's website on the homepage. The news release along with the financial statements and MD&A are also posted on the website.

Please note that certain statements to be made today by the management may contain forward-looking information. Forward-looking statements are subject to known and unknown risks, uncertainties and other factors that may cause the actual results to be materially different from those expressed or implied by such forward-looking statement. For more information, we refer you to our detailed cautionary note on yesterday's press releases.

Please note that all dollar amounts mentioned on this call are US dollars unless otherwise noted.

I will now turn the call over to Paul.

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Paul Douglas Martin, Detour Gold Corporation - CEO, President and Director [3]

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Thanks, Laurie, and thanks, everyone, for joining us for our Q1 call. And I'd like to first start by talking about some of our safety initiatives for 2017.

And I have to say we are pleased with the progression on our safety initiatives towards our goal of the Zero Harm or our commitment to 0. And when we look at safety trends, are an important aspect to look at. And as you can see on the graph, the blue line, which represents DGC employees, we can see a nice trend downward on our frequency. And this signifies strong engagement towards the safety programs that we're initiating.

However, on the contractor site, which you can see on the hashed circle or the green line, the last 6 months, we've seen an upward trend. And as part of our priorities for 2017, contractor management; a visible, felt leadership for our contractors; accountability by our contractors for their safety performance, is a key priority for us.

And of course, you can never train enough on safety. And it's a continuous process that we continue to follow at Detour Gold.

But I'd also like to take a moment to pay tribute. Today is April 28, is National Day of Mourning for persons killed or injured in the workplace. And we at Detour are thinking about the impact on our employees and their families and the need to continually remain vigilant.

And the Day of Mourning was actually created in Canada in 1984 in Sudbury. The unions adopted the day as the one to publicly acknowledge workplace injuries, illness and death. And this has now grown into a worldwide phenomena. So it's a day of reflection and one that really resonates with everyone within the industry. As we know, this is -- can be a dangerous industry, and we must focus on safety.

Also this week, and we had the benefit of having a gentleman by the name of Spencer Beach at site. And Spencer is a worker who, many years ago while working in Saskatchewan, suffered third and fourth degree burns from a flash fire to 90% of his body. And Spencer is now a motivational speaker and a safety awareness champion. And he was speaking with our employees about his experience as the core message on safety awareness and how lives can change in a split-second. And although I have not had the opportunity to meet Spencer, I can confidently say he's an amazingly courageous individual.

So on to top line for Q1. We started off the year with right direction, in fact, our best-ever gold production for Q1 at 131,418 ounces. And this puts us in a good position to achieve our guidance for 2017. We sold 134,213 ounces with total cash cost of $788 and all-in sustaining cost of $1,118. And as expected, these amounts are towards the higher end of the guidance range due to our relatively low ounce profile for Q1. And we expect stronger results for the year to follow, based on improved grades.

From a financial perspective, with strong margins at $22 million, and then we realized earnings of $0.03 and adjusted net earnings of $0.06. Our cash levels increased to $133 million after reflecting a reduction of debt by an additional $20 million. And this places us in an excellent position to be at or below $300 million when we refinance our notes.

From an operational perspective, the mill performed really well with 5.2 million tonnes of throughput, or slightly over 58,000 tonnes per day, and that's inclusive of our first of 3 planned shutdowns. The milling rate did benefit from 25% -- 29% of the feed coming from softer talc ore which is prominent in the Campbell pit are, although something like 6% of the overall reserves. The other side of talc ore is it tends to have a poorer rheology, and this can impact our recoveries. So obviously, the goal for us is to blend this material as best as we can. Grade at 0.88 and recovery is at 89%, were also on plan.

For the mine. In Q1, we mined 900,000 tonnes more than in Q4. We commissioned our sixth shovel at the end of the quarter. And the new ROM fleet is now operational. And we expect to see further improvement in the mining rate in Q2 over Q1. And with a target of Q3 to reach 25 million tonnes per quarter mining rate, following the delivery and commissioning of the 3 new haulage trucks in Q2.

And our third-party operational review has commenced, and it's focusing on mine ops and mine maintenance with initial emphasis on drill and blast. And over some 45 weeks, our consultants will focus on improving processes, further standardizing procedures and driving out waste in how we do things to increase our output while maintaining the key focus on safety.

For cost, total cash cost and all-in sustaining cost performed at similar levels to Q4 despite lower ounces sold. These amounts were higher than in the corresponding quarter in 2016, and it's necessary to reflect on some of the reasons for that in total cash cost.

The Canadian dollar was stronger in this quarter, representing about $40 per ounce. We had the mill shutdown, as I've referred to, which didn't occur in the prior quarter, and that's an additional $40 per ounce. And we had higher stripping charges that were expensed in this quarter versus the prior quarter, and that represents approximately $70 per ounce. And with respect to all-in sustaining cost, they were higher as we had expenditures of $24 million higher than we had in the comparative quarter, and that added $180.

But capital for Q1 was below the average for the year, and we expect Q2 and Q3 to be higher as the TMA construction season commences. And the major capital additions, as you can see on the slide, relate to the mining fleet, and this is inclusive of our sixth shovel which is been accrued but will be paid in Q2, and the ROM fleet, as I also mentioned.

With respect to our guidance, we are reiterating our guidance following a successful Q1 as grades are expected to improve as the year progresses, supporting increased production and decreasing cost. And some of the keys to attaining the guidance will be to maintain the throughput levels in the mill, keeping the focus on Campbell pit mine -- the Campbell pit mining plan. And as you will recall, we planned to mine 6 benches in 2017 to expose better grades.

But at the same time, we have to balance the Campbell pit progress, which is lower-productivity mining, for the present; and Phase 2 stripping, which is critical for the future. And we must be keenly focused on maintaining the balance between these 2 areas. And while not explicit to 2017, the ordering of the seventh shovel to be operational at the beginning of 2018 in support of our 600,000 ounce to 670,000 ounce preliminary guidance is also in the works.

On to West Detour. As you know, we decoupled the permitting timeline for West Detour in our updated life of mine. And now our focus returns to garnering alignment with our First Nations partners. And I can say full engagement has resumed. I'm confident that a balanced and fair path forward with our partners will be found. And we continue to await the response from the federal government on whether we will be in a federal or provincial permitting process. And our best guess of timing on that is by the end of June while the province continues to review the provincial permit that we did submit at the end of January.

For Zone 58, we completed the winter drill program with our focus between 250 meters and 450 meters to assist in assessing if wider ore zones are present. And we plan to extend this drill program in the summer season, in part as the winter season was a little shorter due to a milder winter. And the opportunity here for us is to see if we can have a higher mine output from this potential deposit. And that obviously fits better with the size of the mill that we have at Detour Lake.

Now I'll turn it over to Jim to provide some additional color on the progress and our refinancing.

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James Whyte Mavor, Detour Gold Corporation - CFO [4]

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Thank you, Paul. For those of you were not able to join us on our March 23 life of mine presentation, I'll give you some background on this slide.

As you know, we have our convertible notes that mature on November 30 of this year, which is just 7 months away. As of March 31, we had $338 million of these notes outstanding and needing to be refinanced. As well, our existing $135 million credit facility matures at the end of this summer. So our job is to arrange at least enough money to repay the $338 million of notes, keep the $30 million of letters of credit that are outstanding, and then have a buffer for extra liquidity. And that buffer would be in the form of a revolver. And we'd like to have at least $100 million and up to $150 million. So that brings us to a total target refinancing of $450 million to $500 million, as shown in the future column on the left.

So in April, we approached our current syndicate of 5 banks and asked for their proposals and the best ideas as to how best structure the financing. And I'm pleased to report that all of our banks are supportive of our request. And as result, I foresee a bank-only financing of up to $500 million to refinance the notes and to replace the existing credit facility.

We're going to work diligently with the bank group, and I'd expect to close this new facility by the end of June. And that should be pretty straightforward as we just need to drop in the new business terms into an existing credit agreement which has already been established for a number of years.

So to recap, the $338 million of notes that are currently outstanding will become drawn debt under this new bank facility. And we hope to have an undrawn revolver of $100 million to $150 million. And our overall leverage will be unchanged and still relatively low at 1.3x net debt to EBITDA.

Back to you, Paul.

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Paul Douglas Martin, Detour Gold Corporation - CEO, President and Director [5]

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Thank you, Jim. So just a few closing comments before we open the call up for questions. We're certainly off to a good start in Q1, and we're looking forward to stronger performance throughout 2017. The gold price and exchange rates support stronger cash flows as we budgeted $1,200 gold and 1.3 Canadian exchange rate, or a CAD equivalent of CAD 1,560 gold price versus the current spot, which is over CAD 1,700.

And the catalyst to improve our evaluation will be derived from a non-dilutive refinancing of our notes, as Jim has already covered; planned increase in gold production, both from improved grades and operating performance; and garnering greater harmony in our relationship with our aboriginal partners.

And we're optimistic about the future, including greater consistency and stability from the operation. And Detour Gold remains a unique company with a world-class, long-life asset which will yield benefits for decades to come.

Now I'll turn the call over to the operator to open up for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) First question comes from Rahul Paul with Canaccord Genuity.

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Rahul Paul, Canaccord Genuity Limited, Research Division - Director [2]

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Jim, you spoke a little bit about the -- what you're expecting to put in place with the $450 million to $500 million bank debt. I understand that nothing is final yet, but could you give us some idea about the indicative terms that you're seeing at this point? I.e. interest rates, maturity dates, hedging requirements, covenant, that sort of thing.

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James Whyte Mavor, Detour Gold Corporation - CFO [3]

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Well, Rahul, these are still being negotiated. But what we are trying to put in places is 2-pronged facility. One will be in the form of a term loan and the other part will be in the form of a revolving credit facility, is what we currently have. The term loan is going to be outstanding for a shorter period of time. And then the revolver will be the company's long-term going forward source of liquidity. We currently have one for $135 million, and we would expect to at least double that size so that it's more appropriate for the size of our business. But as far as the interest rates and the covenants, I prefer to not prejudice the bank discussions and let that just fall out through the next 4 to 6 weeks.

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Rahul Paul, Canaccord Genuity Limited, Research Division - Director [4]

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Okay. Fair enough. And then clarification on that. When you say short term, what would you have in mind? I mean, you're looking at, like, a 2-year period or 3-year beyond this. The reason I'm asking is because you've got 2019 and 2020, where you need some flexibility. So when you say short-term, are you looking for something that expires after that? Or...

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James Whyte Mavor, Detour Gold Corporation - CFO [5]

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Yes, we'd be looking to put the term loan out 3 years and then a revolver even beyond that.

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Rahul Paul, Canaccord Genuity Limited, Research Division - Director [6]

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Okay. Fair enough. That helps. And then last question on that. Like, I mean, at this point, would the lenders want to see a certain minimum cash balance that might require you to do an equity raise? Basically, what I'm getting at is now that you have the terms -- indicative terms, at least, in front of you, how likely do you think an equity raise would be at this point?

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James Whyte Mavor, Detour Gold Corporation - CFO [7]

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Well, I don't see an equity raise in the pipe at all.

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Paul Douglas Martin, Detour Gold Corporation - CEO, President and Director [8]

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Yes. And I'll second that one, Rahul.

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Operator [9]

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The next question is from Kerry Smith with Haywood Securities.

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Kerry Smith, Haywood Securities Inc., Research Division - VP, Senior Mining Analyst and Director [10]

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Paul or Pierre, the 6060 was up and running as of the end of March here. So is it fully commissioned and running 100% now? Or is there a ramp up for that piece of equipment?

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Pierre Beaudoin, Detour Gold Corporation - COO [11]

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Yes, we finalized the commissioning, Kerry, in the second half of March. So it was fully available, accessible at the beginning of Q2. And we plan to use this sixth piece of equipment to do some [PCR] now and maintenance on some of other of the units. So in Q2, if I had to average how many shovel we're going to have, it's probably closer to 5, still, in Q2. As we are -- and we are also waiting for a couple more trucks to come online. So we're taking advantage of the extra shovel we have in Q2 to do a little more maintenance while we try to recalibrate a number of trucks to better match 6 shovels.

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Kerry Smith, Haywood Securities Inc., Research Division - VP, Senior Mining Analyst and Director [12]

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Okay. And then I was going to ask, the 4 trucks, when would they be fully up and running?

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Pierre Beaudoin, Detour Gold Corporation - COO [13]

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At this point, at the end of April, I think we're going to have 30 trucks operational. And by the end of June, I would say we should be very close to 32.

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Kerry Smith, Haywood Securities Inc., Research Division - VP, Senior Mining Analyst and Director [14]

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Okay. And then -- okay, so what would be -- Q2 productivity rates from the equipment fleet with the kind of similar to where you're at? And I guess it will only take a quarter to get that new fleet fully ramped up. So what might be the total tonnes out of the pit every day by the start of Q3, let's say? Or what is your kind of target this year, let's say, to exit 2017 in terms of total material moved with that fleet that you'll now have?

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Pierre Beaudoin, Detour Gold Corporation - COO [15]

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Well, we did -- as Paul said, Q1 was about our best-ever quarter, not only for gold production, but also for tonne ex pit. So we're very glad to see the results of Q1 in our ex pits rate. Q1 has always been our most difficult month. And the guys actually pulled a very good one this year. And the expectation really quarter-after-quarter now is to see this increase. We're going to provide a little more equipment in Q2. Paul alluded to the fact also that shovel 7 has been actually ordered. It's in progress. We also have 2 more trucks coming very early in next year. So essentially, we're building up according to the plan that we disclosed in the life of mine. And if you want to talk quarter-after-quarter, than our expectation is really to see an increase in mine ex pit quarter-after-quarter. And that's certainly what we expect out of Q2, even though we know that for a better part of the month, we are going to have -- we're going to be remaining at 5 shovel.

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Kerry Smith, Haywood Securities Inc., Research Division - VP, Senior Mining Analyst and Director [16]

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I got you, okay. And the next liner change, Pierre, when -- you said you're going to have 3 this year. So you had one. When would the next one be scheduled -- and roughly? Would it be in Q3, I guess, and the last one, that at the end of Q4? Is that kind of the scheduled?

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Pierre Beaudoin, Detour Gold Corporation - COO [17]

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No, we kind of changed a bit our approach on this. We reviewed the -- all the operating time in the plant. And we're looking at 3-phase approach there in the plant, and -- to improve our operating time. And one of them is actually to change a bit of our approach on these big shutdowns and consider doing shutdowns on a more regular basis but have them a little shorter. And as far as this year, we were planning to do 3 shutdown, and we elected to do -- the second one was supposed to do in July. We could still do it within July, but we elected to do it actually in June. And it's to make sure, essentially, that we have the appropriate number of people available at the end of June. So we're expecting another shutdown in June. And after that, I think it's probably going to be the beginning of Q4. But it's not impossible that we change this approach. And as I said, do this shutdown a little more regularly. We are thinking now every 2.5 months, but making them a lot shorter. So anyway, the team at site is evaluating this option.

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Kerry Smith, Haywood Securities Inc., Research Division - VP, Senior Mining Analyst and Director [18]

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Okay, okay. And then just one last question. How many meters do you think you'll be able to drill in this summer drill program? Or what is the plan?

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Pierre Beaudoin, Detour Gold Corporation - COO [19]

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If I answered this question, you would have the answer before the board does. So I'm going to give you -- give me a week. And we'll inform the board first. And we know what we want to do. And the plan is already -- Jean Francois and (inaudible) has worked on it this week, and we're going to make this available to the board first. And then we'll be happy to update the market when it's ready.

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Operator [20]

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(Operator Instructions) The next question comes from Mike Parkin with Desjardins.

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Michael Parkin, Desjardins Securities Inc., Research Division - Precious Metals Analyst [21]

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Could you just speak to the change in the profile of the cash G&A and the depreciation per ounce? And is that something -- can you give me a sense of where you expect that to track on a go-forward basis?

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James Whyte Mavor, Detour Gold Corporation - CFO [22]

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So Mike, it's Jim. As far as depreciation, it is pretty straight forward. We have a number of assets that are depreciated on units of production, so that's based on the total reserves. So as our reserves were unchanged year-over-year, that flows down to depreciation rate. And then the other major issue would be we've been, I guess, increasing the size of tailing cell #1, the TMA cell #1. We're going to have a longer life than we had contemplated say a year, 1.5 years ago. And as a result, the depreciation on that major asset that has slowed down as well. That accounts for the decrease from $300 an ounce to where it is today.

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Michael Parkin, Desjardins Securities Inc., Research Division - Precious Metals Analyst [23]

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Okay. So using something similar to Q1 is -- would be fair going forward?

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James Whyte Mavor, Detour Gold Corporation - CFO [24]

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I think that would be appropriate.

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Michael Parkin, Desjardins Securities Inc., Research Division - Precious Metals Analyst [25]

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Okay. And then your cash G&A actually showed a fairly significant drop there. You've been over $5 million on the cash portion for last several quarters, now you're at $3.5 million. Is that a quarterly anomaly? Or go-forward rate?

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James Whyte Mavor, Detour Gold Corporation - CFO [26]

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Right. So you're referring to be G&A on the income statement. And the -- we have had some cost reductions at the corporate office. But to be fair, the biggest component is we don't have as large share price or share compensation in Q1. Just that's always valued based on the current share price, which was, what, CAD 15 or CAD 16 versus something higher last year.

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Kerry Smith, Haywood Securities Inc., Research Division - VP, Senior Mining Analyst and Director [27]

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Okay. So for an annual basis, would around $19 million for the cash portion be fair?

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James Whyte Mavor, Detour Gold Corporation - CFO [28]

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No. The -- as I recall in our press release at the end of January, we give guidance for corporate of about CAD 21 million, and then a separate component for share-based compensation. So I'd like to say I would still go with that.

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Operator [29]

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Next question is from Anita Soni with Credit Suisse.

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Anita Soni, Crédit Suisse AG, Research Division - Research Analyst [30]

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Just a couple of questions. One with regards to the sales versus production. Could you give me some color on the differential there this quarter?

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James Whyte Mavor, Detour Gold Corporation - CFO [31]

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So this is just one of the timing issues. We -- I think most -- there were a couple of quarters in 2016 where we undersold relative to production. We did have a couple of very large cores right at the end of December of last year that we couldn't sell in '16. So they made it into first quarter of this year, and that's all.

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Anita Soni, Crédit Suisse AG, Research Division - Research Analyst [32]

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And then second question was with regards to the consumables that you were talking about, the higher consumables this quarter in the plant. Could you just give me some color on what was going on there?

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Pierre Beaudoin, Detour Gold Corporation - COO [33]

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Yes. I'm going to answer this one. It's mainly related to cyanide and SO2 this time around. Paul has eluded to the fact that we processed 29% talc-chlorite. When we process this material, what happen is the rheology in the leach tank change significantly, it puts pressure on the leach kinetics. And the only answer we have against that if we want to maintain throughput is to actually add more cyanide and try to maximize the oxygen. And more cyanide also means that we need to adjust SO2. So I'm just going to conclude on saying that the reserve's at 5% or 6% talc-chlorite. For this year, we're planning to process 15%. It's probably the year in the life of mine that's got -- it's going to hit most talc-chlorite simply because we have more in the Campbell pit. And it's -- it was scheduled for 15% of talc-chlorite this year. And in the first quarter, we processed 29%. So going forward, it's called to go down, and the impact of this is also called to go down. So we see -- and that's the reason why we de-rated the recovery for this year. So when Paul says that we're satisfied with 89%, it's actually de-rated because we knew that we would face an issue this year with this one.

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Anita Soni, Crédit Suisse AG, Research Division - Research Analyst [34]

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Sorry, and the 89% that you're talking about, can you just remind me, did you -- is it -- did you de-rate that in the life of mine plan? Or is that just now that you're doing it?

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Pierre Beaudoin, Detour Gold Corporation - COO [35]

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Yes, 2017 is included in the life of mine. Absolutely.

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Anita Soni, Crédit Suisse AG, Research Division - Research Analyst [36]

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Okay, so you had said 89% for this year in the life of mine plan.

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Pierre Beaudoin, Detour Gold Corporation - COO [37]

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I don't -- yes. It -- where essentially the budget for 2017 made its way to the life of mine.

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Anita Soni, Crédit Suisse AG, Research Division - Research Analyst [38]

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Great. And then just lastly on the CapEx spend this quarter. Do you expect that to ramp up over the course of the year?

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James Whyte Mavor, Detour Gold Corporation - CFO [39]

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Well, Anita, so although it looks slower, at least on the cash flow statement, I think there was only $24 million out the door, we do still hang our hat on the overall capital for the year between $160 million to $180 million. And you'll notice in one of our notes in the financials, the -- we did have significant additions in Q1. I think it was about $48 million. So the difference just has not been paid yet.

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Anita Soni, Crédit Suisse AG, Research Division - Research Analyst [40]

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Right. And then the last question, I guess, would be on strip ratios. So this quarter, I guess I was just sort of expecting a little bit lower strip because I thought you were going to be still sort of confined and near the bottom of the pit. But it seems like you're running closer to the average. How does that evolve over the course of the year?

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Pierre Beaudoin, Detour Gold Corporation - COO [41]

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Over the course of the year, the strip ratio is called to increase because, essentially, the amount of ore is going to be fairly pretty stable and we're planning to increase the mining rate. So it would translate into more material coming from Phase 2. And in Phase 2, we have almost no ore this year from Phase 2. So strip ratio would be called to come up going forward.

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Anita Soni, Crédit Suisse AG, Research Division - Research Analyst [42]

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Okay. So just sequentially quarter-over-quarter increasing.

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Pierre Beaudoin, Detour Gold Corporation - COO [43]

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Yes. In general, yes. But obviously, we need to work with the geology of the deposit. And it's not impossible that you see fluctuation there as well.

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Operator [44]

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This concludes the question-and-answer session. I would now like to turn the conference back over to Paul for any closing remarks.

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Paul Douglas Martin, Detour Gold Corporation - CEO, President and Director [45]

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Okay. Thank you, operator. Just want to thank everybody for participating. As we said, we're off to a good start with Q1, and we're looking forward to the rest of the year. And for any investors who remain on the phone, if you haven't voted your shares, please vote them as our annual meeting is next week. Thanks so much, and everyone have a safe weekend. Bye-bye.

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Operator [46]

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This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.