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Edited Transcript of GCM.TO earnings conference call or presentation 14-Nov-18 2:30pm GMT

Q3 2018 Gran Colombia Gold Corp Earnings Call

TORONTO Jan 3, 2019 (Thomson StreetEvents) -- Edited Transcript of Gran Colombia Gold Corp earnings conference call or presentation Wednesday, November 14, 2018 at 2:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Lombardo Paredes Arenas

Gran Colombia Gold Corp. - CEO

* Michael Monier Davies

Gran Colombia Gold Corp. - CFO

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Presentation

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Operator [1]

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Welcome to the Gran Colombia Gold Third Quarter 2018 Results Webcast. My name is Hilda, and I will be your operator for today. (Operator Instructions) Please note that this conference is being recorded. I will now turn the call over to Mr. Mike Davies. Sir, you may begin.

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Michael Monier Davies, Gran Colombia Gold Corp. - CFO [2]

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Great. Thank you, Hilda. Good morning, and thank you for joining us again today for our 2018 third quarter and first 9 months results webcast. With me on the webcast this morning is our CEO, Lombardo Paredes. And I'll first go through our prepared remarks regarding our performance in the first 9 months of this year, and then Lombardo will be available as we open things up for the Q&A session.

Before we proceed with the presentation, I would first like to draw your attention to our legal disclaimer regarding forward-looking statements that will be made by us during the webcast this morning. Each quarter this year, I've been providing you with an update on our progress against our stated objectives to execute our strategy in 2018. As we reported last quarter, we settled our 2018 debentures at maturity in August with shares. Our total issued and outstanding shares now stands at 48.2 million. And if you include the in-the-money 2024 warrants plus our stock options, our fully diluted share count would increase to about 63 million shares.

We're happy to report that we've successfully completed our objective in 2018 to improve our capital structure, which has reduced the more significant dilution exposure to our shareholders that existed under the previous convertible debentures structure. And we've strengthened our balance sheet by reducing debt, increasing cash and turning our working capital positive at the end of September.

We have made commitments to investors when we marketed the offering earlier this year that we would apply for listings for the new Gold Notes and the warrants. We've since been successful on both accounts with the 2024 warrants commencing trading in September and the Gold Notes in October. We also upgraded our listing in the U.S. from the pink sheets to the OTCQX in October, opening a channel for U.S. investors to more easily access our common shares. And in October, Fitch announced that they had upgraded our rating from a B- to a B as a result of our capital structure improvements and the enhancements we have made at Segovia, focusing on our high-grade mines, controlling costs and driving cash flow. We're very pleased with each of these comments -- accomplishments in 2018.

The second objective we had set for this year was to continue the implementation of the optimized mine plan at Segovia. Segovia continues to be our primary cash-generating asset, and we expect to invest about $30 million-or-so this year in the continuation of the exploration, development, expansion and modernization programs, of which we spent about $23 million in the first 9 months. Of this total expenditure, about 50% was spent on exploration and development, and the balance was dedicated to various projects in the mines, the Maria Dama plant, environmental initiatives and site infrastructure. In September, we completed the ventilation shaft to the Providencia mine. In the photo on this slide, you can see the 2 [Halton] exhaust fans, which were 350 horsepower each and sit over top of a 2.5-meter diameter portal. At El Silencio, the [Alimak] will soon be breaking through to the concrete collar of the new ventilation shaft being constructed at that mine. With the fans on site by the end of the year, El Silencio's new ventilation shaft should be operational in the first quarter of next year. These are just a couple of examples of how our capital investment is being used to improve working conditions in our mines. Also construction of the El Chocho tailings storage facility is proceeding well, and the new filter press will be installed and commissioned in the first half of next year. Overall, we continue to make very good progress modernizing and mechanizing our operations, to build our platform at Segovia, to support further expansion of our production in a safe, environmentally responsible and cost-efficient manner.

We've made 2 announcements this year in June and October providing detailed interim results from of our 2018 drilling program at Segovia. By the end of September, we've completed approximately 81% of this year's campaign with results continuing to increase our confidence in the mineral resources at our 3 producing mines. We've identified new structures at each of our El Silencio and Sandra K mines, and a new high-grade zone near the ore body currently in production at Providencia. Early results from step-out drilling at the Cristales Vein are encouraging, and we expect to follow-up on the high-grade channel sampling results from the deep levels of the El Silencio mine, with a 6-month 10,000 meters drilling program starting before the end of this year to test extensions below the deepest part of the El Silencio mine.

At Marmato, we announced results of the first 9 holes in early October, where we've identified 2 new zones of deep style mineralization and continue to increase our confidence in the geological model. Drilling continues, and we expect to announce further results before the end of the year.

Last night, we released our operating and financial results for the third quarter and first 9 months of 2018. We're pleased to be able to report another positive quarter of continued improvement as we execute our strategy. In our third quarter and first 9 months of 2018, we saw improvement in gold production and sales, revenue, adjusted EBITDA and adjusted net income compared to the third quarter and first 9 months last year. In addition, we continue to maintain our cash cost and all-in sustaining cost below our expectations for this year, reflecting the impact of the higher production on these per ounce metrics. Over the next few slides, we'll take a closer look at the results we reported last night.

This is our fourth consecutive quarter reporting more than 50,000 ounces of gold production and our best quarter in our 8-year history. Segovia accounted for approximately 51,000 ounces of our total third quarter production, up 69% over the third quarter last year, which was a bit of anomaly as a result of the civil disruption that slowed production for the entire month of August 2017. Production growth in 2018 continues to be driven by the development and capital investment in the company-operated areas within our high-grade Providencia mine. The success of Providencia, coupled with stability of production from the other company mines at Segovia and Marmato, led to total gold production for the first 9 months of 2018 to almost 163,000 ounces, up 33% over the first 9 months last year.

And from this chart, you can continue to see that Segovia continues to be a key catalyst in our production growth. With 18,065 ounces of production in October, our first 10 months total production this year is now about 181,000 ounces, which I would point out is 4% more than we produced in all of last year. Our trailing 12 months total gold production at the end of October reached 215,000 ounces. And with just 2 months to go, we've refined our annual guidance for 2018 to a range of 214,000 to 220,000 ounces of gold.

The company's total cash cost per ounce continued to be heavily influenced by the optimized production cost of our Segovia operations, which represented about 89% of total gold sales. As you can see on this chart, Segovia's cash cost in the current and prior years has steadily been well below $700 per ounce, and we continue to expect it will remain below $700 per ounce for the balance of this year. At Marmato, total cash cost has historically been higher than Segovia due to the lower mine grades and the fact we've not yet optimized its production cost as we have at Segovia. This will come with the underground expansion project we are currently studying. Our model's cash costs in the first 9 months of 2018 were adversely impacted by lower-grade material early in the second quarter. Mine management made the necessary corrections. And since June, cash costs have come back down below $1,100 per ounce where we expect them to be for the balance of this year. For the first 9 months of 2018, our company average cash cost was $674 per ounce, down from $720 per ounce in the first 9 months last year, largely reflecting the increased proportion of our total gold production coming from the lower-cost Segovia operations this year.

Our all-in sustaining costs continue to be fairly steady. Our cash cost has been trending at or below $700 per ounce and our all-in cost at the $900 level. For the fourth quarter of 2018, we don't see much trend -- change in this trend.

We reported adjusted EBITDA of about $25 million for the third quarter of 2018, slightly lower than the previous quarters due to softening of gold prices in July. Increased production and continued control of our operating cost helped to mitigate some of that impact. That brought our adjusted EBITDA for the first 9 months of 2018 to $78.7 million, up 62% over the first 9 months last year. Our trailing 12 months adjusted EBITDA at the end of September reached a new record for Gran Colombia at just over $105 million, up 40% over 2017's annual adjusted EBITDA. This has been a major driving force behind our improved cash flow from operations this year, which was $56 million in the first 9 months of 2018, up 73% over the first 9 months last year.

Turning to our balance sheet at the end of September, there are several improvements to highlight. First, we've moved from a working capital deficit in our previous quarters into a positive working capital position at the end of the third quarter. Increasing our cash balance to $29.5 million at the end of September was a key catalyst, driven by our improved operating cash flow, the return of unused sinking fund balances to our treasury and about $4 million of extra cash proceeds raised in our Gold Notes offering over what we needed for debt retirement earlier this year.

We also took the first steps in the third quarter to begin to reduce our payables related to the Marmato project compensation agreements, decreasing our obligation to just under $8 million, and we still have more work ahead of us to reduce or eliminate these obligations, given the change in our plans for Marmato from the previous open-pit concept to an underground mine expansion.

With the capital structure improvements completed this year, our total debt at the end of September was reduced to $93 million. And with the quarterly repayment completed at the end of October, our Gold Notes are now down to $88 million.

For the next 2 quarterly repayments in January and April 2019, we do have put option contracts already in place to protect our guaranteed floor price for these payments at $1,250 per ounce.

And lastly, before we get to the Q&A portion of this morning's webcast, I would like to reiterate our outlook for 2018. Our objectives remain unchanged, although we can now count the capital structure improvement as complete. Our focus continues to center on the execution of our mine plant at Segovia and the exploration programs at both Segovia and Marmato. We've refined our production guidance, which is well above our initial estimates for 2018, and we're maintaining our guidance for 2018's cash cost and all-in sustaining cost per ounce. The first 9 months of 2018 have been very positive for us. And despite the volatility in gold price, we remain excited about what the future has in store for Gran Colombia. With that, Hilda, we're now ready to open the Q&A session.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

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Michael Monier Davies, Gran Colombia Gold Corp. - CFO [2]

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All right. Well, if we have no questions, we appreciate you joining us this morning. Sorry, Hilda.

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Operator [3]

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Yes, we do have some questions now. I apologize. The first question comes from [Ashif Lalani] who is a private investor.

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Unidentified Participant, [4]

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Just had a question about Segovia and the mill capacity you have there. What potential production numbers should we see under optimal conditions? And how much CapEx will be required to get there?

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Michael Monier Davies, Gran Colombia Gold Corp. - CFO [5]

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Lombardo, would you like to handle that, please?

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Lombardo Paredes Arenas, Gran Colombia Gold Corp. - CEO [6]

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Yes, yes. Could you repeat the question, please?

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Unidentified Participant, [7]

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Yes. I was wondering about the mill capacity at Segovia? And what would be the potential production that you would see at Segovia under optimal conditions? And how much capital is required to get there?

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Lombardo Paredes Arenas, Gran Colombia Gold Corp. - CEO [8]

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All right. Yes, the mill capacity in Segovia now is around 1,300. In first quarter next year, the mill capacity will increase to 1,500. So under ideal condition, no problems, we -- next year we can -- we will be able to produce around the same amount of gold that we will produce this year. Next year, we will maintain the 1 month in delays. And also we are working to increase the capacity of the mill to 2,000 tonnes per day. The idea is just to continue increasing the production in Segovia. So we are confident that in the next 3 years, we will be in a much better position than we are right now. Probably, we can be around 250, 250 or something like that.

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Operator [9]

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The next question comes from [Tys Brown] from (inaudible) Partners.

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Unidentified Analyst, [10]

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I've got 2 questions. The first one is, when we look at this, like $23 million CapEx spend that you guys have had year-to-date, do you guys measure an ROIC or how do you think about new CapEx spend versus other uses of the capital like delevering?

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Michael Monier Davies, Gran Colombia Gold Corp. - CFO [11]

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I think the answer to that is rooted in the fact that our capital spend is looking at the optimized life of mine plan that we began developing back in 2015, essentially focused on bringing the 2 million ounces of resource we have at Segovia ultimately into production. As you see in the first 9 months results, about half of that spending is on exploration and development, and it's about $4 million in exploration and the balance on development. Development for us is a key capital requirement for us on an ongoing basis to bring the new areas in the mines into operations. And the exploration for us, I think, hard to measure on an initial ROI basis. But it's certainly an important element both in infill drilling to support our mine plans. But as we're starting to see now, it's important part of us unlocking the blue sky potential as we step out to the other 24 known veins in Segovia. So the remainder of the CapEx that we look at, we basically are prioritizing it based on its ability to support production, to improve the infrastructure, to move material out of the mines in a more efficient basis, health and safety and environment, and in some ways as we've seen with ventilation and other things, the working conditions for miners. Some of those things are hard to measure on an ROI basis. But I think when we compare that, we've always balanced the use of our cash flow the last couple of years, split between debt reduction, which I think we've been very successful at in terms of reducing debt to less than half of where it was in early 2016 and building our assets so that, as Lombardo said, we can take this model up to 250,000-plus ounces at Segovia in a couple of years' time.

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Unidentified Analyst, [12]

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I'm sorry. I'll take you back to the other slide. Of that $23 million, what's the breakdown between just maintenance spend and what is the new blue sky exploration spend?

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Michael Monier Davies, Gran Colombia Gold Corp. - CFO [13]

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We didn't provide it on that slide. Of the exploration spend this year, I'd say about more than 3/4 of that is still on infill drilling, the existing resources to support the mine plans of the 3 mines. And about 1/4 of it starting to handle the step-out drilling. Is that what you're looking for?

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Unidentified Analyst, [14]

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Yes. Okay. One last point, and I'll get off. So looks like in Q3, you guys averaged about 19,000 ounces a month. And in October that's down to 18,000. Is there just something anomalous there, what's causing that?

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Michael Monier Davies, Gran Colombia Gold Corp. - CFO [15]

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I think the answer to that is -- go ahead, Lombardo.

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Lombardo Paredes Arenas, Gran Colombia Gold Corp. - CEO [16]

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Okay. Don't worry about that. Okay. The 19,000 ounces was a record. A solid production in Segovia, as it is now, is around 18,000-plus. So with 18,000 -- and this year, in fact, the average will be around that. That's the reason because we are projecting 250,000 ounces for the year, taking into consideration the production in Marmato, which is going to be stable around 25,000 ounces. We have 3 smeltings, for example, in [Belmont] in Segovia. And with this smelting, we are producing 5,000-plus ounces. So the solid production in Segovia is around 18,300, 18,400, something like that. I repeat, the 19,000 was a record for the year, but not only for the year, for the life of Gran Colombia whole as a company.

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Operator [17]

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And the last question comes from [Hanif Jamal] from [Jamal Holdings].

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Unidentified Analyst, [18]

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I've 2 questions. What do you see for Marmato going forward into 2020 and 2021?

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Michael Monier Davies, Gran Colombia Gold Corp. - CFO [19]

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I think at this point it's still early to say. Our focus right now is on the 8,500-meter drilling program that's in process and the studies that we're working on with JDS that are going to gain more momentum towards the end of the year as the results of this round of drilling take place. So I'd like to think that by 2020, if we are able to complete the PEA next year as planned, we've moved it forward to the next level of prefeasibility or feasibility study. But I think that's probably as much as we can plan for at this point.

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Unidentified Analyst, [20]

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Okay. And currently at Segovia, what are you doing as far as the tonnes per day through the mill?

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Lombardo Paredes Arenas, Gran Colombia Gold Corp. - CEO [21]

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Could you repeat the question, please?

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Unidentified Analyst, [22]

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So for this third quarter at Segovia, the average tonnes per day going through the mill?

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Lombardo Paredes Arenas, Gran Colombia Gold Corp. - CEO [23]

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Okay. Well, now our average tonnes per day going to the mill is around 1,200.

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Unidentified Analyst, [24]

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Okay. 1,200. Okay. And you said that you could possibly work towards 2,000 tonnes a day based on how you progress on underground stope development?

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Lombardo Paredes Arenas, Gran Colombia Gold Corp. - CEO [25]

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Yes. Our projection for the mill capacities, the first quarter next year we are going to be around 1,500. And then for 2020, we are planning to be in 2,000 hundreds -- excuse me, 2,000 tonnes per day. And that -- remember that we are focusing on 3 or 4 things in Segovia. One thing is, mainly is cost reduction, cost optimization. Second thing is exploration, to develop the most extensive veins of resources that we have in Segovia. There are 24, 25 veins, and we did touch only 7. So it's a lot of veins that we didn't touch already. And the third thing is infrastructure. We have to put more mineral on the surface. So that's the reason because our priorities are exploration, cost and infrastructure of the mines in order to produce more and being able to put more tonnes in the mill.

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Unidentified Analyst, [26]

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Okay. Now have you guys got any plans for stockpiling ore?

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Lombardo Paredes Arenas, Gran Colombia Gold Corp. - CEO [27]

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Yes. We are -- well, in fact, we are. Based on the experience that we have had in the past, now we have on a stockpile of 15,000 tonnes of ore, and we are building -- we are start -- we will start to build another stock jar. And that stock jar -- that jar will be ready probably by mid next year. And with that new jar, we are going to be much better positioned to stock better.

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Unidentified Analyst, [28]

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Okay. And do you know the grams per tonne on the 15,000 tonnes you have right now?

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Lombardo Paredes Arenas, Gran Colombia Gold Corp. - CEO [29]

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Excuse me. Can you repeat the question, please?

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Michael Monier Davies, Gran Colombia Gold Corp. - CFO [30]

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What's the grade on the tonne, the 15,000?

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Lombardo Paredes Arenas, Gran Colombia Gold Corp. - CEO [31]

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No, no. Well, we have jar for that. We have more jars. We don't have a single -- excuse me, go ahead.

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Michael Monier Davies, Gran Colombia Gold Corp. - CFO [32]

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The 15,000 tonnes, Lombardo, he is asking what's the average head grade in the 15,000 tonne stockpile.

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Lombardo Paredes Arenas, Gran Colombia Gold Corp. - CEO [33]

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Well, it will be not different for the average grade that we have nowadays, which is around 17.

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Unidentified Analyst, [34]

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Okay. And then my last question is. I'm not going to hold you to this, but what do you think approximately would be the CapEx spend to get to 2,000 tonnes per day?

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Lombardo Paredes Arenas, Gran Colombia Gold Corp. - CEO [35]

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Well to get the 2,000 tonnes per day, well, I don't have a precise number now. But to that, I have -- I can give you a number, which is off the top of my head, but it has to be above $40 million.

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Unidentified Analyst, [36]

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$40 million. And does that include...

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Lombardo Paredes Arenas, Gran Colombia Gold Corp. - CEO [37]

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It has to be above $40 million.

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Unidentified Analyst, [38]

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Okay. Is that the mill -- is that including the underground development or is it just the mill?

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Lombardo Paredes Arenas, Gran Colombia Gold Corp. - CEO [39]

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Yes. Basically, as I said before, our investment will be basically concentrated in development -- exploration, development and infrastructure. And the infrastructure includes the expansion of the mill. It will be the expansion of the mill. It will be ventilation because we need -- as we -- if we are going into the depths of El Silencio mine, for example, we have to do more ventilation and also hoisting system. So in order to be either -- again, to put much more mineral on the mill.

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Unidentified Analyst, [40]

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Okay. Totally understood, it takes time.

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Michael Monier Davies, Gran Colombia Gold Corp. - CFO [41]

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Yes. So Lombardo, the -- just the mill portion of the CapEx to take it from 1,500 to 2,000. What's that amount of CapEx?

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Lombardo Paredes Arenas, Gran Colombia Gold Corp. - CEO [42]

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Not too much. It will be around $3.5 million. No more than that.

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Unidentified Analyst, [43]

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Okay, got it. So I do understand that it takes time to put the shafts and so forth. Now I also am an investor in Torex Gold. And they recently went through all the stuff they did, the last few months with the mine being shut down and safety problems. So what are you guys doing differently to address social values in your part of the world? Are you doing anything differently today to address the communities need, so that you don't see another problem going forward?

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Lombardo Paredes Arenas, Gran Colombia Gold Corp. - CEO [44]

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In my opinion and according with the media and the government in Colombia, we are doing a very good -- a very nice job in Segovia, for example. We are mainly concentrated in education and infrastructure. And the third point is to formalize some illegal miners, which we still have in our title. And well, in my opinion, we have been quite successful doing that. We have -- now we have a very tight -- very good relation with the community because we are investing in education and roads and that kind of things. And also with the mine, to give you an idea, for example, we have been able to formalize around 3,000 miners, which were illegal, to say so illegal miners in the past. So the social impact of that is huge because 3,000 persons work and you're not receiving good salaries and social security and health and safety implements under our supervision. That is around probably 20% of the workforce in Segovia and -- Segovia and Remedios, which are the communities around our title in that area.

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Unidentified Analyst, [45]

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Okay. I've one more question. Just to confirm, fully diluted shares as of today is 63 million shares plus you got your Gold Notes, which are $98 million. Is it $98 million?

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Michael Monier Davies, Gran Colombia Gold Corp. - CFO [46]

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$88 million at this point.

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Unidentified Analyst, [47]

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$88 million. So if I add the 2 of those up, I get your market cap?

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Michael Monier Davies, Gran Colombia Gold Corp. - CFO [48]

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Enterprise value.

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Unidentified Analyst, [49]

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Yes, enterprise value. Okay, correct. Now are there any plans to hedge the floor price of your gold into 2020 and 2021?

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Michael Monier Davies, Gran Colombia Gold Corp. - CFO [50]

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It depends on the nature of how we can do that. Right now, it's not commercially feasible to go beyond about 6 months with the types of hedging we've looked at. So for that reason, right now, we are covered to the second payment next year of April. But we'll continue as we roll out each quarter to look ahead. And to the extent it's commercially reasonable, we'll continue to have hedging in place to protect that floor price.

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Operator [51]

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We show no other questions at this time.

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Michael Monier Davies, Gran Colombia Gold Corp. - CFO [52]

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All right. Well, we appreciate you attending this morning and the questions. And if you have any further things, please contact us. But otherwise, look forward to catching up with you at our next webcast. Thank you.

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Operator [53]

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Thank you, ladies and gentlemen. This concludes today's conference. We thank you for participating. You may now disconnect.