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Edited Transcript of GPR.TO earnings conference call or presentation 26-Jul-19 12:30pm GMT

Q2 2019 Great Panther Mining Ltd Earnings Call

VANCOUVER Aug 10, 2019 (Thomson StreetEvents) -- Edited Transcript of Great Panther Mining Ltd earnings conference call or presentation Friday, July 26, 2019 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Alex Heath

Great Panther Mining Limited - Director of Corporate Development & IR

* James M. Bannantine

Great Panther Mining Limited - President, CEO & Non-Independent Director

* Jeffrey Robert Mason

Great Panther Mining Limited - Chairman of the Board

* Jim A. Zadra

Great Panther Mining Limited - CFO & Corporate Secretary

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Conference Call Participants

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* Craig Philip Stanley

Eight Capital, Research Division - Principal & Precious Metals Analyst

* Heiko Felix Ihle

H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research and Senior Metals & Mining Analyst

* Matthew Dennis O'Keefe

Cantor Fitzgerald Canada Corporation, Research Division - Research 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 Great Panther Mining Second Quarter 2019 Financial Results Conference Call and Webcast. (Operator Instructions) I would now like to turn the conference over to Alex Heath, Director of Corporate Development and Investor Relations. Please go ahead.

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Alex Heath, Great Panther Mining Limited - Director of Corporate Development & IR [2]

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Thank you, Ediel. Good morning, everyone, and thank you for taking the time to participate on our call today. With me here this morning are Jeffrey Mason, Chair of Great Panther; James Bannantine, President and CEO; and Jim Zadra, Chief Financial Officer.

Before we begin, I would like to mention that some of the commentary on today's call contains forward-looking statements. You should be cautioned that actual results and future events may differ from those noted in today's presentation. The commentary also refers to various non-GAAP measures, definitions and reconciliations that are included in the company's MD&A for the quarter ended June 30, 2019. All dollar amounts expressed in this presentation and the associated financial statements and MD&A are in U.S. dollars, unless otherwise noted.

I'd like to remind everyone that this conference call is being recorded and will be available for replay later today. Replay information and the presentation slides accompanying this conference call and webcast will be available on our website at greatpanther.com. I'd like to turn the call over now to Great Panther's Chairman, Jeffrey Mason.

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Jeffrey Robert Mason, Great Panther Mining Limited - Chairman of the Board [3]

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Thank you, Alex. Good morning, everyone. Thank you for joining us on this call this morning. I'm Jeffrey Mason, the new Chair of Great Panther. And I simply want to introduce myself and also share a few thoughts on Great Panther. As some of you may know, I've been a Director and an Adviser to the company since May 2014, along with serving as the Chair of the Acquisition and Integration Special Committee. I am truly honored to take on this important responsibility and want to thank my predecessor Bob Garnett for his leadership over the past 7 years.

We have started an exciting new chapter with the acquisition of the Tucano Gold Mine in Brazil. While we maintain meaningful exposure to silver from our Mexican silver mines, nearly 85% of our revenue will be derived from gold. We announced the Tucano acquisition agreement on September 23, 2018, when gold was just $1,200, and by the March 5, 2019, closing of the transaction, gold was at $1,288. Today, it's $1,420, and most of the rise in the gold price has only been realized in the last 60 days, as gold was still trading in the low $1,300s in June.

This acquisition was possible through our patience, prudent capital management and disciplined operation of our mines.

Notably, our shareholders have continued to be patient and support our mission. Thank you, shareholders. Overall, I am very excited to be part of the team to realize our move to be an intermediate gold and silver producer that is nearing annual production of 200,000 gold equivalent ounces with further potential to grow. We're at a positive inflection point as we combine our disciplined operating approach with a very capable and talented team of the Tucano Gold Mine. We have many promising opportunities ahead of us, and we importantly have the right team, the right skill sets to execute on these goals.

So a special call-out to all our team members. Thank you all. And over to our CEO, Mr. Jim Bannantine. Thank you.

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James M. Bannantine, Great Panther Mining Limited - President, CEO & Non-Independent Director [4]

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Thank you, Jeffrey, and welcome. On our call today, ladies and gentlemen, we'll provide the highlights for the second quarter. Then follow with an overview of our operation and financial results, discuss our outlook for 2019 and finally conclude with a question-and-answer session. The second quarter of 2019 reflected the first full quarter of our ownership and stewardship of the Tucano Gold Mine, which we acquired in March. For the quarter, consolidated gold equivalent production was up by 195% compared to last year, highlighting the significant growth attributed to the acquisition. During this first full quarter of ownership, we completed a very key optimization milestone for Tucano, the commissioning of the supplemental oxygen system. This marked the completion of a significant plant upgrade initiated by the previous owner. Gold recoveries and grades are up markedly since the commissioning of the supplemental oxygen system, and we're poised to further increase production in Q3 and Q4 of this year.

We also advanced an exploration program at Tucano, which will see over 35,000 meters of drilling completed over the 2019 to 2020 campaign. At our Mexican silver operations, Topia increased metal production by 7% compared to the previous year. Throughput has increased with our staged expansion project there, which is expected to be completed in 2020. At the Guanajuato Mine Complex or GMC, exploration continues with an updated 43-101 resource report expected by Q1 2020. At

Coricancha, in Peru, we successfully completed the bulk sample program or BSP. The results of the BSP confirmed the key findings of the PEA we completed for Coricancha in 2018, and we're targeting restarting operations there next year subject to availability of capital, which includes ensuring we continue our ongoing investments in near mine and regional exploration at Tucano, which we see as a very important priority.

Our consolidated production guidance for 2019 remains unchanged at 171,500 to 185,000 gold equivalent ounces. Great Panther's production remains heavily levered to precious metals with 83% of metal value attributable to gold and 12% to silver based on our 2019 guidance.

At our Tucano Gold Mine, we produced 29,899 ounces of gold during the second quarter, up from 5,164 ounces produced during the 26-day period of ownership in Q1. As noted, the commissioning of the supplemental oxygen system at the end of April was a major milestone for Tucano. The effect of the commissioning can be clearly seen in the table at the bottom of the slide. May and June production shows a marked increase in grade and recoveries as well as total gold ounces produced. We're continuing to see the improved performance in our July production, which stood at 9,900 ounces at the close of business on July 24.

Prior to the installation of the supplemental oxygen, production was limited in its ability to process higher-grade sulfide ore and maintain higher recovery rates. As the mine is transitioning to primarily higher-grade sulfide ore, this was a significant constraint on the operation that has now been resolved during the quarter.

With this key aspect of the Tucano plant optimization now completed, we're able to operate in a manner that maximizes grade, especially through the second half of the year.

Tucano's production guidance for the full calendar year 2019 is expected to range from 145,000 to 155,000 gold ounces, with between 35,600 and 38,600 ounces in the third quarter, and between 55,000 and 59,600 ounces in the fourth quarter. Tucano's production profile is heavily weighted to the latter half of the year due to the rainy season in the first half and pit sequencing that includes higher stripping in the first 2 quarters of the year.

The noted improvements in processing make us confident in our ability to achieve our gold production guidance for the year.

In addition, cash costs and all-in sustaining costs are expected to continue to decrease in Q3 and Q4 due to higher grades and higher production.

Turning to our Mexican silver operations. Although our primary metal produced by value is now gold as a result of the acquisition of Tucano, we will continue to use and report cost metrics per payable silver ounce to manage and evaluate operating performance at our Mexican silver mines. Metal production in Topia was 414,000 silver equivalent ounces in the quarter, which represented a 7% increase over the first quarter in the previous year.

The increase was attributed mainly to higher silver and gold head grades. The completion date for the planned plant expansion for Topia has been revised to the first quarter of 2020 with our focus on Tucano at the moment.

At GMC, Guanajuato Mining Complex, ore continues to be sourced exclusively from the San Ignacio mine, while we continue exploration activities at the Guanajuato mine, which together with the San Ignacio mine and a shared plant comprised our Guanajuato Mining Complex or GMC. Metal production from the GMC was approximately 388,000 ounces silver equivalent for the second quarter, an increase of 9% compared to the first quarter of this year. Grades and recoveries improved since the previous quarter as our operations and geology teams continue to focus on optimizing and improving San Ignacio and advancing the exploration of Guanajuato. At our Coricancha project in Peru, we successfully completed the bulk sample program or BSP in the second quarter. We're pleased with the results of the BSP, which confirmed the key operating assumptions of the positive PEA filed last year.

And the project has the potential to add a further 3 million silver equivalent ounces or 40,000 ounces of gold equivalent to our production profile.

We'll look to restart operations in 2020 after the Tucano ramp-up is completed on the basis that we have sufficient capital to advance the project.

I will now hand the call over to Jim Zadra, our Chief Financial Officer, to discuss our financial summary for the second quarter.

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Jim A. Zadra, Great Panther Mining Limited - CFO & Corporate Secretary [5]

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Thanks, Jim, and welcome to all who've joined us on the call today. As noted, the second quarter of 2019 reflected our first full quarter of Tucano under our ownership, which had a significant impact on our financial results.

Our revenue and mine operating earnings for the second quarter, mine operating earnings before noncash items increased to 165% and 187%, respectively, relative to the second quarter of 2018.

Although Tucano drove a strong increase in cash earnings at the mine operations level, we reported net loss of $0.02 per share after accounting for noncash items, $4.5 million in exploration and evaluation and development costs or EE&D, and $3.2 million in G&A expenses, both of which are below the mine operating earnings line and reflected nonrecurring costs.

Our EE&D expenditures included $3.2 million or about $0.01 a share related to the Coricancha bulk sample program, which was completed in the second quarter. Coricancha EE&D expenses are expected to decrease to lower levels as the project awaits the start of development activities in 2020.

G&A expenses included approximately $1.2 million primarily related to Tucano's former head office and associated onetime charges. We're well along the process of rationalizing and we'll start to see the benefit of head office cost synergies in this quarter. These expenditures are expected to decrease to approximately $0.5 million in each of the third and fourth quarters and will be materially eliminated by the end of the first quarter of 2020.

In addition to the expected decrease in our EE&D and G&A costs, the planned ramp-up in production at Tucano is expected to positively impact our financial results in the third and fourth quarters of 2019. For the second quarter, consolidated cash cost was $914 per gold ounce and all-in sustaining cost excluding corporate G&A was $1,167 per gold ounce.

With the noted improvements in Tucano's processing and higher productivity in the second half, AISC is also expected to improve and achieve our guidance of $1,030 to $1,130 per payable gold ounce. During the second quarter, we significantly reduced outstanding debt assumed through the acquisition of Tucano.

Most of the repayments were in connection with change of control provisions or negotiated arrangements in connection with the acquisition of Tucano.

Debt repayments totaled approximately $20 million, including $10.5 million of convertible debentures, $5 million in scheduled repayments to an unsecured lender and $5 million in scheduled repayments under our secured credit facility with a syndicate of Brazilian banks.

In addition, the unsecured creditor converted $7 million of debt to equity under terms negotiated in connection with the acquisition.

And subsequent to the quarter, this creditor converted a final $3.5 million remaining convertible portion. The remaining debt on our balance sheet consists of about $15 million of revolving credit facilities with Brazilian banks and about $24 million with the unsecured creditor with the term to June 2022.

We also funded working capital for Tucano, as its operations were constrained prior to May in terms of its ability to process the higher-grade sulfide ore, which added to the working capital needs of the lower productivity period of the mine.

Working capital needs for Tucano were also impacted by higher-than-normal gold inventory at the end of the quarter of 7,800 ounces. These were primarily in transit or with the refiner. Although these net working capital impacts drew on cash, Tucano was profitable for the second quarter as evidenced by our mine operating earnings and operating cash flow, and we expect the cash generation of the operation to significantly improve with the planned increase in production in the third and fourth quarters. Even though our financial results are expected to benefit from the planned increase in production in the following quarters, we've been seeking and evaluating opportunities to refinance some of the recent Tucano debt repayments in order to increase our working capital and provide capital for other projects.

These include exploration at Tucano and various continuous improvement and optimization projects for the mine that are in an advanced stage of scoping and design.

In addition, we have plans for further exploration of our Mexican mines and the restart of Coricancha as we previously noted.

I also note that we announced a $25 million at-the-market offering in July. To date, we have not drawn on any of the ATM facility. I will now turn the call back to our President and CEO, Jim Bannantine.

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James M. Bannantine, Great Panther Mining Limited - President, CEO & Non-Independent Director [6]

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Thank you, Jim. So we're maintaining our production guidance for 2019. For Brazil, we expect gold production of between 125,000 and 135,000 ounces. For Mexico, our guidance remains the same, but quoted in gold equivalents works out to 46,500 to 50,000 gold equivalent ounces with an 80:1 silver to gold ratio.

Total consolidated guidance is expected within the range of 171,500 to 185,000 gold equivalent ounces. Cash costs are expected to be between $820 and $890 per gold equivalent ounce sold, while all-in sustaining cost, including corporate G&A -- excuse me, excluding corporate G&A, of $1,030 to $1,130 per gold ounce sold. Thank you, and I'll now open the call for questions, operator.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Heiko Ihle of H.C. Wainwright.

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Heiko Felix Ihle, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research and Senior Metals & Mining Analyst [2]

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Congratulations to Jeffrey Mason on this new appointment. And also, to point on the intrinsic value of Tucano going up meaningfully given we're sitting at $1,460 gold right now. The $4.5 million in judicial deposits that you have on your balance sheet, seems like you're confident that it will be ruled in your favor as per your MD&A. Any color as to the time lines when you anticipate that this will be resolved that the lawyers have said or that you feel like it and when you actually get the cash money back?

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Jim A. Zadra, Great Panther Mining Limited - CFO & Corporate Secretary [3]

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Heiko, it's Jim Zadra. I hate to provide any guidance on that. We're obviously -- we're working to get that resolved as quickly as possible. But I'd hesitate to give you any guidance right now.

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James M. Bannantine, Great Panther Mining Limited - President, CEO & Non-Independent Director [4]

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You saw we got those guidances [removed] early in the year, right?

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Heiko Felix Ihle, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research and Senior Metals & Mining Analyst [5]

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Right. Okay. I think the next one you'll answer though, I hope. Going through your MD&A again, on the inventory break. I mean obviously inventories are up sharply given the transaction. But I'm just still a little curious, which should we be using sort of as a new baseline for capital tied up in materials and supplies, just general inventory levels from the new baseline level here with Tucano included? Is it fair to just take the old inventories and add them in? Or do you anticipate that you'll have some sort of efficiencies that will run at a little bit leaner and sort of just cut down on capital tied up?

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Jim A. Zadra, Great Panther Mining Limited - CFO & Corporate Secretary [6]

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Heiko, it's Jim, again. As I noted in the call, we had an unusually high amount of ending doré inventory at 7,800 ounces. We certainly don't expect to have that level of inventory at the close of quarters going forward. We will have some, maybe 1,000, 1,500 ounces I would expect to be a normal level of closing inventory for doré. In terms of the operation, our stockpiles were a little higher than normal as well. So I think it's safe to assume that the inventory levels should come down, and in particular, on the ending inventory of doré.

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James M. Bannantine, Great Panther Mining Limited - President, CEO & Non-Independent Director [7]

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There's not a specific synergy from mine to mine on the inventory, but we are working on each of our mines individually to optimize the capital employed there in inventory.

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Heiko Felix Ihle, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research and Senior Metals & Mining Analyst [8]

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Okay. Fair. And then just a more philosophical question, I guess. During the introduction, Jeffrey had mentioned the added gold potential of Tucano. Can you just sort of guide the market and people on this call for some of the maybe not-so-apparent drivers that you're focusing on for what could go right for longer-term goal, please?

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James M. Bannantine, Great Panther Mining Limited - President, CEO & Non-Independent Director [9]

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Yes. So the big-ticket item there, I would say, is exploration at Tucano. And we're -- since we closed on the Tucano acquisition, we have been drilling. As we note, there's an extensive set of concessions across a very wide area there in a fairly prolific greenstone belt at Tucano. So we think there is a lot to discover there at Tucano. Obviously, we announced the potential for a Coricancha restart next year, which would be roughly a 20%, 25% increase in our production levels. So there is a -- we hope also that our exploration at Tucano can help us find increased grades and mass with our -- inside of our existing mining operations. So there is a -- we think there's a lot of potential for growth there.

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Operator [10]

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(Operator Instructions) Our next question comes from Matthew O'Keefe of Cantor Fitzgerald.

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Matthew Dennis O'Keefe, Cantor Fitzgerald Canada Corporation, Research Division - Research Analyst [11]

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So it looks like you're making some good progress down there at Tucano. But just to help me out a little bit. I was wondering if you could explain to me a little bit more on the supplemental oxygen system and what kind of recoveries you had, what you're seeing now, and what your target is, and if that is what it feeds into your current guidance.

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James M. Bannantine, Great Panther Mining Limited - President, CEO & Non-Independent Director [12]

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Sure, Matt. So the supplemental oxygen system that we note in our release that was installed and commissioned and put into operation on April 30 is a liquid oxygen system that supplements an oxygen manufacturing plant that's already installed at site. What that allows us to do is to achieve over 93% recoveries which we're achieving and on which our guidance is based, and we're comfortable with that.

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Matthew Dennis O'Keefe, Cantor Fitzgerald Canada Corporation, Research Division - Research Analyst [13]

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Okay. And what was it before the system, the oxygen system?

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James M. Bannantine, Great Panther Mining Limited - President, CEO & Non-Independent Director [14]

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It was down in the high 80s and low 90s, but that was a totally different feed, right? That was oxide -- low-grade oxide.

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Matthew Dennis O'Keefe, Cantor Fitzgerald Canada Corporation, Research Division - Research Analyst [15]

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Right. Okay. And then can you remind us again the capital to put in that supplemental system?

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James M. Bannantine, Great Panther Mining Limited - President, CEO & Non-Independent Director [16]

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So the supplemental oxygen system as noted was the last element of a plant upgrade to handle the sulfides in the mine. So there was a new ball mill, a thickener, extra CIL tankage and an oxygen system installed. The supplemental oxygen system was just a small addition to that larger plant upgrade. The larger plant upgrade mainly installed by the previous owners was about $35 million. This supplemental oxygen system was just a couple of million dollars on top of that.

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Matthew Dennis O'Keefe, Cantor Fitzgerald Canada Corporation, Research Division - Research Analyst [17]

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Right. Okay. That's what I suspected. Okay, well that's -- really that was just it for me. Just it looks like things are definitely heading in the right direction.

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James M. Bannantine, Great Panther Mining Limited - President, CEO & Non-Independent Director [18]

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Thanks. We believe they are.

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Operator [19]

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Our next question comes from Craig Stanley of Eight Capital.

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Craig Philip Stanley, Eight Capital, Research Division - Principal & Precious Metals Analyst [20]

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The question I had, how much more in dollars terms is there at the MACA debt that they can still convert into shares?

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Jim A. Zadra, Great Panther Mining Limited - CFO & Corporate Secretary [21]

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At this point, Craig, it's all converted.

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James M. Bannantine, Great Panther Mining Limited - President, CEO & Non-Independent Director [22]

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The last convert -- there was 3 quarters' worth of conversion opportunity at AUD 5 million per quarter and they converted the last quarter's worth.

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Craig Philip Stanley, Eight Capital, Research Division - Principal & Precious Metals Analyst [23]

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Okay. Great. So that's maybe a small overhang that's now going to be removed from the stock.

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Jim A. Zadra, Great Panther Mining Limited - CFO & Corporate Secretary [24]

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Yes.

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James M. Bannantine, Great Panther Mining Limited - President, CEO & Non-Independent Director [25]

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Yes. It's -- most of it is removed, there's a little bit left out there, we believe, we don't know for sure.

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Operator [26]

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This concludes the question-and-answer session. I'd like to turn the conference back over to James Bannantine for any closing remarks.

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James M. Bannantine, Great Panther Mining Limited - President, CEO & Non-Independent Director [27]

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Thank you, Ediel. In closing, I'd like to reiterate that we're really excited about our achievements at Tucano to date. With gold production for Tucano increasing in the third and fourth quarter along with production from our Mexican silver operations, Great Panther provides shareholders with a significant exposure to gold and silver. Thank you for your participation today, and on behalf of everyone here at Great Panther, I look forward to sharing our progress with you next quarter. Have a great day.

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Jeffrey Robert Mason, Great Panther Mining Limited - Chairman of the Board [28]

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Thank you.

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Operator [29]

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