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Edited Transcript of ELD.TO earnings conference call or presentation 2-Aug-19 3:30pm GMT

Q2 2019 Eldorado Gold Corp Earnings Call

VANCOUVER Aug 4, 2019 (Thomson StreetEvents) -- Edited Transcript of Eldorado Gold Corp earnings conference call or presentation Friday, August 2, 2019 at 3:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* George Raymond Burns

Eldorado Gold Corporation - President, CEO & Director

* Paul James Skayman

Eldorado Gold Corporation - Executive VP & COO

* Peter Lekich

Eldorado Gold Corporation - Manager of IR

* Philip Chow Yee

Eldorado Gold Corporation - Executive VP & CFO

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Conference Call Participants

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* Carey MacRury

Canaccord Genuity Corp., Research Division - Analyst of Metals and Mining

* Michael Parkin

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

* Tanya M. Jakusconek

Scotiabank Global Banking and Markets, Research Division - Analyst

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Presentation

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Operator [1]

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Thank you for standing by. This is the conference operator. Welcome to the Eldorado Gold Corporation Second Quarter 2019 Results Conference Call.

(Operator Instructions) And the conference is being recorded. (Operator Instructions)

I would now like to turn the conference over to Peter Lekich, Manager Investor Relations. Please go ahead, Mr. Lekich.

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Peter Lekich, Eldorado Gold Corporation - Manager of IR [2]

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Thank you, operator. And thank you, ladies and gentlemen, for taking the time to dial into our conference call today.

With me in Vancouver, this morning, are George Burns, President and CEO; Phil Yee, Executive Vice President and CFO; Paul Skayman, Executive Vice President and COO; and Jason Cho, Executive Vice President and Chief Strategy Officer.

Our release yesterday details our 2019 second quarter financial and operating results. This should be read in conjunction with our second quarter financial statements and management's discussion and analysis, both of which are available on our website. They have also been filed on SEDAR and EDGAR. All dollar figures discussed today are in U.S. dollars unless otherwise stated. We will be speaking to the slides that accompany this webcast. You can download a copy of these slides from our website.

Before we begin, I would like to remind you that any projections included in our discussion today are likely to involve risks, which are outlined and detailed in our 2018 AIF and in the cautionary note on Slide 1.

I will now turn the call over to George.

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George Raymond Burns, Eldorado Gold Corporation - President, CEO & Director [3]

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Thanks, Peter, and good morning, everyone.

Here's the format for today's call. I'll give an overview of the quarter's highlights along with comments, then I'll pass it over to Phil, to go through the financials. Paul will follow by reviewing operations and then we'll open it up for questions.

Over to Q2 highlights on the next slide. It was a steady quarter operationally with consolidated production and cost on plan. Lamaque completed its first quarter of commercial production and we caught up on concentrate sales at Efemçukuru and Olympias as indicated in our preliminary Q2 results, released earlier this month. The results in higher sales volumes and revenue during the quarter and results from concentrate inventory to normal -- and we've returned concentrate inventory to normal levels.

Financially, we ended the quarter with net earnings of $12.2 million at -- or $0.08 per share. However, onetime asset sales are now included in our adjusted net earnings, and we ended the quarter with an adjusted net loss of $1.2 million or $0.01 per share.

I'd like to point out that we had $7.6 million in net proceeds from precommercial sales at Lamaque during the quarter. If this had been attributed to our earnings, it would have increased our adjusted earnings per share by approximately $0.05. A milestone was reached during the quarter with completion of refinancing and resulted in reducing our gross debt by $100 million and pushing out near-term debt maturities.

We believe that completion of refinancing, together with the recent gold price appreciation, Lamaque progressing into commercial production and the outcome of Greek elections has contributed to positive momentum in both our equity and credit. We're expecting a stronger second half of the year with increased production at Kisladag and Olympias positively impacting cash flows. This will give us

the financial flexibility to pay down debt and reinvest in our business. We remain on track with consolidated annual guidance of between 390,000 and 420,000 ounces of gold at cash cost of $550 to $600 per ounce. We also divested the 2 smaller noncore assets. During the quarter, we completed a sale of a net smelter royalty in Turkey. Subsequent to the quarter, we signed an agreement to sell our Vila Nova iron ore mine in Brazil. The sale will reduce our mine standby cost by over $1 million a year.

A few words on Greece on Slide 4, as I know everyone's keen for more color here. We've had positive engagement with the Greek government and are encouraged by the dialogue we've had thus far. The decision to form a joint committee between the ministry and ourself indicates a willingness to collaborate on a mutually accepted path forward. We are committed to building safe, modern, world-class operations in Greece. This includes implementing best available technologies such as dry stack tailings at Skouries, which would reduce the project's environmental footprint by 40%. Our investments will generate well-paying jobs for families and local businesses, deliver corporate social responsibility projects and provide significant tax and export revenues for generations. These goals are shared by the government.

So on that note, I'll hand it over to Phil to talk through the financials.

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Philip Chow Yee, Eldorado Gold Corporation - Executive VP & CFO [4]

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Thanks, George. Good morning, everyone. On Slide 5, we have an overview of our financial results for Q2 2019.

During the quarter, Eldorado generated $173.7 million in total metal sales revenue, which include $150.1 million in gold revenues. Revenues were higher than the comparative period in 2018 due to a 20.7% increase in gold sales volumes in the Q2 of 2019 and a higher averaged realized gold price in Q2 2019 over Q2 2018. The increase in gold sales volumes were a result of the delayed timing in the sale of previous quarter inventory at both Efemçukuru and Olympias.

Total metal sales revenues do not include the 11,705 ounces of precommercial production from Lamaque that were sold in the quarter. In compliance with IFRS accounting requirements, the $15 million in proceeds from the sale of these precommercial ounces are offset against the Lamaque project capital costs.

Cash operating costs averaged $631 per ounce sold in Q2 2019, an increase from $587 per ounce sold in Q2 2018. This reflects -- sorry, this increase reflects the impact of lower production levels at Olympias and higher treatment and selling costs of Efemçukuru concentrate.

All-in sustaining costs averaged $917 per ounce sold in Q2 2019, lower than the $934 per ounce sold in Q2 2018. The comparative decrease in all-in sustaining cost per ounce sold was a result of higher sales volumes, partially offset by higher sustaining capital expenditures compared to the prior year quarter. I would reiterate that management expects cost to be in line with the 2019 consolidated guidance, as production is forecasted to increase at both Kisladag and Olympias in the second half of the year.

Sustaining capital expenditures totaled $15.6 million or $137 per ounce sold in Q2 2019. This is versus $13.8 million or $146 per ounce sold in Q2 of 2018. This increase is due to $5.3 million of sustaining capital at Lamaque incurred in its first quarter of commercial operations in Q2 of 2019. We expect sustaining CapEx to be in line with the 2019 consolidated guidance.

I would also like to highlight that Eldorado produced positive free cash flow in Q2 2019. The company has reached a key inflection point at the beginning of Q2 with Lamaque commencing commercial production and growth capital spend is expected to be minimal for the remainder of 2019. The company realized other income of $8.7 million during the quarter, which includes $8.1 million of proceeds from the sale of a net smelter royalty held on a property in Turkey. We also realized $11.7 million from a reversal of impairment due to the planned sale of Vila Nova, which is expected to close in Q3 of 2019.

Eldorado also completed the debt refinancing in Q2, which derisked our balance sheet. We issued $300 million in new high yield notes and closed a new $450 million credit facility with an expanded syndicate of lenders. The new credit facility includes a new $200 million term loan and a renewal of the $250 million revolver, which was due to expire in June of 2020. We used the proceeds from the new notes and the new term loan, together with $100 million cash on hand, to redeem the $600 million senior notes, which had a scheduled maturity date of December of 2020.

Finance cost totaled $16.8 million in Q2 2019, which included a $3.6 million write-off of the unamortized transaction costs related to the senior notes that we redeemed during the quarter.

Interest costs increased relative to the comparative quarter, as interest charges are no longer being capitalized, following declaration on commercial production at Lamaque on March 31 of 2019.

Going forward, we expect our interest costs to be in the ballpark of approximately $12 million per quarter for the remainder of the year. This includes fees for the line of credit and amortization of transaction costs. And this may vary slightly quarter-to-quarter as the portion of the debt is now at variable rates.

The company reported net earnings to shareholders of $12.2 million or $0.08 per share for Q2 of 2019. The adjusted net loss in the quarter was $1.2 million or $0.01 per share after removing, among other things, the impact of a onetime asset sale.

The strong sales in the quarter resulted in EBITDA of $74.5 million and adjusted EBITDA of $66.8 million for Q2 2019. Adjusted EBITDA excludes the impact of onetime asset sale, but also includes net proceeds from the sale of precommercial production at Lamaque.

As you can see from our statement of cash flows, there was $7.6 million in net proceeds from the sale of the 11,705 ounces of precommercial production at Lamaque in the quarter.

Just a quick reminder that in accordance with IFRS accounting requirements, proceeds from the sale of precommercial production ounces are not recorded in revenue and are not included in income for the quarter. The proceeds are recorded as a reduction in project capital and do not appear in the condensed consolidated interim statement of operations.

The net proceeds from the sale of the Lamaque precommercial ounces equates to approximately $0.05 per share and would be in addition to the $0.08 per share that is reported for the quarter. We finished the quarter with cash, cash equivalents and term deposits of $119.9 million compared to $227.5 million at the end of Q1. The decrease in cash for the quarter was primarily due to cash used for purposes of reducing the debt and the associated refinancing costs.

I will now turn it over to Paul for a recap of operations.

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Paul James Skayman, Eldorado Gold Corporation - Executive VP & COO [5]

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Thanks, Phil. Good morning, everyone. Starting with Lamaque on Slide 6. Lamaque had an exceptional first quarter of commercial operations. Production in the quarter totaled 33,140 ounces.

Total sales were 36,035 ounces, which included 11,705 ounces of precommercial production. As Phil mentioned, the proceeds from the precommercial sales were not included in the revenue and net earnings for the quarter.

Cash operating costs of $517 per ounce sold were well below guidance, reflecting steady production costs and strong throughput. Underground development continued throughout the quarter and is expected to increase in the second half of the year. With the greater focus on underground development and a planned shift to lower grade stopes, production is expected to be lower in the second half of 2019.

Approval of the final permits for the Tailings Management Facility were received as expected and construction of the second phase of the facility commenced. Exploration during the quarter focused on resource expansion below the C5 zone, lower in the Triangle deposit and testing early-stage nearby targets.

New intercepts from the program included significant positive results from new stepout intercepts on the C7, C9 and C10 zones, and additional intercepts of peripheral stockwork vein zones.

Resource expansion drilling in the lower part of the nearby Plug 4 deposit has confirmed that the mineralized shear and stockwork vein systems continue well below the current resource. Lamaque has significant upside potential based on the excess capacity we have in the mill as well as the positive exploration results we've realized over the past year. Our current focus is to increase production rates and to extend mine life of the Triangle deposit.

Over to Kisladag, on Slide 7. Mining, crushing and stacking resumed on April 1 this year. Production during the quarter totaled 26,072 ounces of gold, mostly from historic material placed on the pad prior to Q2 2018. The recoveries seen on column test work on monthly composites of material placed on the pad is thus far meeting expectations.

Solution flow from the pad is lagging, but this was expected. We have seen an uptick in solution flow from the pad. Because I know we're going to get asked, test work on the longer leach cycles thus far is tracking positively, and we expect to have the results later this year or early 2020. We'll update our guidance on Kisladag at this point.

Over the Efemçukuru, on Slide 8, where production of 25,667 ounces of gold was again on target. Sales of 48,821 ounces of gold during the quarter included delayed inventory from Q1 and returned our concentrate inventory to normal levels.

Cash operating costs were $593 per ounce sold compared to $515 per ounce sold in Q2 2018. The higher costs were primarily a result of increasing costs associated with treatment charges and transport costs. Additionally, market conditions is shifting with slightly higher penalty rate for impurities.

Almost 8,000 meters of exploration drilling were completed during the quarter on the Kokarpinar vein system and on targets in the footwall on the Kestane Beleni vein.

Onto Olympias, on Slide 9. It was a disappointing quarter with Olympias. Production was 6,924 ounces of gold due to limited headings underground as a result of slower-than-anticipated capital development and a backlog of stopes to be filled. This reduced throughput at the plant. However, on a positive note, the mill is performing to plan and concentrate quality and recoveries met our expectations. We mobilized a new contractor during the quarter, and we expect to see capital development to increase over the latter half of the year. Process improvements have been implemented in the paste backfill plant, which will allow for increased rates of stope filling. We have also implemented a business improvement process at Olympias and Stratoni, which got underway in Q2. We are confident that we'll ultimately deliver consistent design throughput and operating costs at this long-life asset.

Sales of gold concentrate containing 14,462 payable ounces during the quarter included inventory of approximately 8,000 payable ounces that are being produced in prior periods. Again, we finished the quarter returning to normal inventory levels.

With that, I'll turn it back over to George.

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George Raymond Burns, Eldorado Gold Corporation - President, CEO & Director [6]

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Thanks, Paul. With an overall good first half of 2019, the momentum of Lamaque reaching commercial production, completion of refinancing and ramp-up at Kisladag, we're well positioned for a strong second half to the year. We remain committed to collaborating with the Greek government to enable our high-quality projects in the country to move forward for the benefit of all stakeholders.

Thank you, everyone. I'll now turn it over to the operator for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Mike Parkin with National Bank Financial.

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Michael Parkin, National Bank Financial, Inc., Research Division - Mining Analyst [2]

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First one on Olympias. Could you give us a bit of a sense of what we should kind of look for, for Q3 relative to Q4? It sounds like with Q3, we might still be seeing a bit of a stope filling and new contractor kind of catching up on development. So my read is slightly softer Q3 still and then potentially kind of coming back strong to finish the year. Could you just give a bit of color on that?

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Paul James Skayman, Eldorado Gold Corporation - Executive VP & COO [3]

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It's Paul. I think that's a fair assessment. The contractor's working underground now and getting up to speed. So Q3 will be an improvement on Q2 and Q4 will obviously be a fair bit stronger, so good read.

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Michael Parkin, National Bank Financial, Inc., Research Division - Mining Analyst [4]

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Okay. Perfect. That's good. And then on Kisladag. Is there any chance to give us a little color in terms of how you're seeing kind of production come in at the fresh ore on the pad for the month of July? Or is it still a little early to kind of comment on that just yet?

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Paul James Skayman, Eldorado Gold Corporation - Executive VP & COO [5]

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Little early to comment. We are seeing an uptick in solution grades coming off the pad. Yes, so it's kind of 3 months in, and we're placing material reasonably high on the pad. So I think it's running to expectations at the moment.

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Operator [6]

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(Operator Instructions) Our next question comes from Tanya Jakusconek with Scotiabank.

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Tanya M. Jakusconek, Scotiabank Global Banking and Markets, Research Division - Analyst [7]

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Just a couple of questions here. Just wanted to follow up on Olympias. Paul, just on the underground, we have a new contractor and, I mean, not to get into the nitty-gritty, but is it because you were not pleased with the performance of the other contractor?

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Paul James Skayman, Eldorado Gold Corporation - Executive VP & COO [8]

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We were actually tackling that ourselves, Tanya, and decided that having more focus from a contractor was going to be more efficient.

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Tanya M. Jakusconek, Scotiabank Global Banking and Markets, Research Division - Analyst [9]

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Okay. So you brought someone in. And this development that you're talking about is going to allow you to have access to higher grade ore also in the second half of the year?

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Paul James Skayman, Eldorado Gold Corporation - Executive VP & COO [10]

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The plan is for slightly higher grade ore, yes. But the key thing obviously is throughput tonnage.

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Tanya M. Jakusconek, Scotiabank Global Banking and Markets, Research Division - Analyst [11]

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Okay. So it's a combination of that. And then your recoveries, there's nothing wrong on that front?

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Paul James Skayman, Eldorado Gold Corporation - Executive VP & COO [12]

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No. That's correct, yes.

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Tanya M. Jakusconek, Scotiabank Global Banking and Markets, Research Division - Analyst [13]

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Okay. And just on Kisladag, I think that guidance shows for higher cost in the second half of the year, even though, we have better production. And then maybe just a little bit on what's happening there? And whether the accounting aspect of it is having an impact on the costs?

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Paul James Skayman, Eldorado Gold Corporation - Executive VP & COO [14]

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I guess I would say that the production obviously going to be stronger second half. I am not really sure of that your question on the accounting. Can you elaborate that?

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Philip Chow Yee, Eldorado Gold Corporation - Executive VP & CFO [15]

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I was just going to say I think in the second half with the higher ounces, higher production, I mean we're expecting to be in line with our guidance on capital expense, most of it is on the sustaining capital side. So we expect that our cost should come down on a per ounce basis.

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Tanya M. Jakusconek, Scotiabank Global Banking and Markets, Research Division - Analyst [16]

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Okay. And then just maybe lastly on Lamaque. When -- Paul, you talked about the grade coming off in the second half of the year, are we looking for Q3 and Q4 to have similar grades?

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Paul James Skayman, Eldorado Gold Corporation - Executive VP & COO [17]

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I'd actually need to have a look at grades for the second half there, Tanya. They're a little bit lower in terms of throughput as well. We've had a pretty strong sort of first half. Yes, a little bit lower grade as well in the second half on average.

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Tanya M. Jakusconek, Scotiabank Global Banking and Markets, Research Division - Analyst [18]

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Okay. And then maybe just turning to George, if I can, just on -- congratulations on getting -- moving forward with the Greek government. You said you've formed a joint committee. Maybe you can talk about this joint committee. How is it going to operate? Who is on it from both sides and sort of some of the critical going forward? Do we have additional meeting set up? Just maybe a bit of clarity on what you're doing there?

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George Raymond Burns, Eldorado Gold Corporation - President, CEO & Director [19]

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Yes. Tanya, we're really excited about the improved environment. We're now in a collaborative setting where both sides are interested in getting these projects moving forward. In terms of the committee, it's -- on Eldorado side, we have our Greek team in country and support from the executive team here in Vancouver. And on the government side, the approvals for mining projects sit in the Ministry of Energy and Environment. So they have their team of experts along with ours. And again, I really don't want to get into any detailed discussions on what we're saying and what the time lines look like, but just we're extremely encouraged by the change in sentiment and we'll be working hard to move in a direction that we can inform the market as to timing and path forward.

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Tanya M. Jakusconek, Scotiabank Global Banking and Markets, Research Division - Analyst [20]

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Okay. And maybe just one last question. Just -- I think I heard on the call that sustaining CapEx for the year, I think Phil mentioned, is going to be -- you are maintaining that sustaining CapEx guidance, even though, you've been running quite low on the first half of the year.

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Philip Chow Yee, Eldorado Gold Corporation - Executive VP & CFO [21]

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That's correct, Tanya. We expect our sustaining CapEx will be in line with our guidance for 2019.

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Tanya M. Jakusconek, Scotiabank Global Banking and Markets, Research Division - Analyst [22]

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Congratulations, George, on getting the Greek government back to sitting at the table.

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George Raymond Burns, Eldorado Gold Corporation - President, CEO & Director [23]

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Yes. Thanks, Tanya?

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Operator [24]

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Our next question is from Carey MacRury with Canaccord Genuity.

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Carey MacRury, Canaccord Genuity Corp., Research Division - Analyst of Metals and Mining [25]

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And just another question on Lamaque. You mentioned you have strong mills throughput there in the quarter. Just wondering what the mining rate there is? And how much of that mill throughput came from stockpile versus the mine?

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Paul James Skayman, Eldorado Gold Corporation - Executive VP & COO [26]

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There was a little bit of a stockpile at the beginning -- well, beginning of the quarter, I guess. But we were able to extract material at the permitted rate of around 1,800 tonnes per day from the Triangle underground.

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Carey MacRury, Canaccord Genuity Corp., Research Division - Analyst of Metals and Mining [27]

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If that flow was coming in Q2 preferably, we can expect that's going to continue for the balance of the year?

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Paul James Skayman, Eldorado Gold Corporation - Executive VP & COO [28]

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Yes.

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Operator [29]

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

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George Raymond Burns, Eldorado Gold Corporation - President, CEO & Director [30]

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Thanks, everybody, for joining the call today. Again, we're really excited about the second half and moving forward with the Greek government to get our important long-life assets in Greece moving forward. So look forward to circling back next quarter with some updated news. Thank you.

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Operator [31]

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