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Edited Transcript of KL earnings conference call or presentation 6-May-20 6:00pm GMT

Q1 2020 Kirkland Lake Gold Ltd Earnings Call

VANCOUVER Jun 2, 2020 (Thomson StreetEvents) -- Edited Transcript of Kirkland Lake Gold Ltd earnings conference call or presentation Wednesday, May 6, 2020 at 6:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Anthony Paul Makuch

Kirkland Lake Gold Ltd. - President, CEO & Director

* David Soares

Kirkland Lake Gold Ltd. - CFO

* David Londono;Detour Lake;General Manager

* Duncan King

Kirkland Lake Gold Ltd. - VP of Mining for Kirkland Lake

* Eric A. Kallio

Kirkland Lake Gold Ltd. - SVP of Exploration

* Evan Pelletier

Kirkland Lake Gold Ltd. - General Manager of Kirkland Lake Operations

* Mark E. F. Utting

Kirkland Lake Gold Ltd. - VP of IR

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Conference Call Participants

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* Cosmos Chiu

CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research & Equity Research Analyst

* Fahad Tariq

Crédit Suisse AG, Research Division - Research Analyst

* Joshua Mark Wolfson

RBC Capital Markets, Research Division - Analyst

* Ovais Habib

Scotiabank Global Banking and Markets, Research Division - Research Analyst, Mining

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Presentation

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Operator [1]

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Good afternoon, ladies and gentlemen. My name is Tarkan, and I will be your conference operator today. I would like to welcome everyone to the Kirkland Lake Gold conference call and webcast to discuss the company's first quarter 2020 financial and operating results. (Operator Instructions)

With that, I would now like to turn the call over to Vice President of Investor Relations, Mark Utting.

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Mark E. F. Utting, Kirkland Lake Gold Ltd. - VP of IR [2]

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Thanks very much, operator. And good afternoon, everyone. Welcome to our first quarter 2020 conference call and webcast. On today's call, we will review the quarter and also discuss some of our projects as well as recent exploration results. We'll also provide some updated information on the COVID-19 response by the company.

With me today are many members of the Kirkland Lake Gold senior management team. Speaking today will be Tony Makuch, our President and CEO; David Soares, our vice -- our Chief Financial Officer; Duncan King, our Vice President of Australian Operations; Evan Pelletier, our General Manager at Kirkland Lake Operations; Dave Londono, our Detour Mine General Manager; and Eric Kallio, our Senior Vice President of Exploration. As mentioned, there are other members in the room as well -- of the management team in the room as well.

As I'm sure many of you are aware, we're doing our call remotely today consistent with our COVID-19 health-and-safety protocols. (Operator Instructions) The slide deck that we'll be referring to is available on our website, both on the homepage and the Events section.

Before we get started, I would like to draw your attention to Slide 2 for our forward-looking statement disclosure. Our remarks and answers to questions today may contain and likely will contain forward-looking information about future events affecting the company. Please refer to Slide 2 as well as the Forward-Looking Information section of our most recent management discussion and analysis dated May 5, 2020, for more information.

Also, during today's call, we'll be making reference to non-IFRS performance measures. A reconciliation of these measures is available in our most recent MD&A. Finally, I'll point out that all figures today are in U.S. dollars unless otherwise stated.

With that, I'll call on Tony Makuch, President and CEO of Kirkland Lake Gold.

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Anthony Paul Makuch, Kirkland Lake Gold Ltd. - President, CEO & Director [3]

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Okay. Thanks, Mark, and thanks, everybody, for being on the call. I know we're not as organized or as -- maybe as sexy sometimes you see some of these conference calls and video calls that's going on, on TV. I think that we know the speakers here, again, we're all in -- everybody's working from the home office, as I'm sure a lot of the -- everybody attending this call is on their home office, so thank you for calling in. I don't know how comfortable you get in your home office, maybe you've gotten comfortable and more organized over time. I know I have but, at the same time, I think I'm getting tired of coming from my home office. It would be nice to get out and about and see people. So anyway, thanks for being on the call.

And the other part is, I think the -- with knowledge of people at Kirkland Lake Gold, we had definitely a pretty solid quarter in Q1 2020 and a lot of adversity, but you can see where quality people rise to the occasion. And that's what we saw, and that's what we see in Kirkland Lake Gold and the company and the communities around this. And a lot of our suppliers and third-party contractors as well, we see there's a lot of quality people in this industry. But the other thing that really happened is that our people did an excellent job protecting themselves and each other and also turned in a very solid quarter of performance in the quarter. So anyway, thanks for the efforts, and thanks for the attention to detail.

Getting into some of the operating results for the quarter, production was 330,000 ounces. Cash costs were $440 an ounce, and all-in sustaining costs averaged $770 (sic) [$776] an ounce. Excluding Detour, these numbers averaged $319 and $619 an ounce, respectively. These are very strong unit cost numbers given the high unusual circumstances in Q1.

Turning to earnings. We reported net earnings of $0.79 per share and $0.70 per share on an adjusted basis. That was a 30% increase from Q1 2019. It is cash flow where our business really showed its strength in Q1 2020. Excluding nonrecurring transaction and restructuring costs, we generated free cash flow of over $190 million, which is a quarterly record. Detour Lake made a significant contribution to free cash flow during the quarter, adding $78 million, and that's in only 2 months of operations with Kirkland Lake. Overall, the quarter highlighted our ability to generate significant cash flow.

Looking at our cash position, as shown on Slide 4. We ended the quarter at $530 million and no debt. And I think as a company, we're probably the only gold company with no debt on the balance sheet at all maintaining, and this demonstrates industry-leading strength in terms of financial performance and financial capabilities.

We returned capital to shareholders. We used $330 million in the quarter to buy back almost 10 million shares and doubled our dividend. We gained about $180 million of cash from Detour. But I want to emphasize that we used much more than that by paying back Detour's debt, closing out its head book, making change of control and other payments and incurring transaction fees related to the deal.

We had total capital expenditures of about $110 million, a lot of that was sustaining capital. In terms of growth capital, we continued to invest in our projects, specifically the #4 Shaft Project at Macassa. We did suspend sinking of the shaft at the end of March due to the COVID-19 issue. The suspension lasted about a month with shaft sinking resuming near the end of April. The shaft project is going very well. And in fact, actually, we've now changed the scope and schedule for the shaft a bit. Evan Pelletier will get into the details a little bit more later in the presentation. But we now expect to complete the shaft in one phase by late 2022, that is over a year earlier than initially planned and at a lower cost.

Turning to Slide 5. Clearly, COVID-19 was a key development impacting our business in Q1 2020. We had a call in early April to discuss the details of our COVID-19 response, including our extensive health and safety protocols. I won't go through them again. I will provide you with an update.

Part of our COVID-19 response included going to reduce operations at Detour Lake and Macassa and temporary suspending operations at the Holt Complex. We also suspended all nonessential activities across the company, which basically any capital project and/or any exploration project that was not critical to the production in the current year.

The reduced operations impacted our production and costs in Q1, and we'll do so again in the second quarter. And we don't know what's going to happen in the third, fourth quarter, depending on how this progresses. It also lead -- led to the suspension of key projects, as I mentioned earlier, such as the shaft, the surface ramp at Macassa and the ventilation project at Fosterville. We also stopped most exploration work not required for this year's production.

We have now returned -- resumed work on these projects as well as others, and we'll be ramping up in phases. We've started to recall workers at Detour Lake and Macassa. And we expect it to be a slow process that may extend over the year.

Turning to Slide 6. The measures we have taken obviously have an impact on our results. April 1, 2020, we withdrew our company guidance for 2020. We will issue guidance for the year as we make progress towards moving Detour Lake and Macassa towards more predictable levels of production. These mines clearly will not produce what was in the original guidance. We will continue to assess how quickly they can ramp up, which will determine the guidance we eventually provide. And you got to understand it also impacts both capital costs, operating costs and exploration costs that was in our original guidance.

We have also withdrawn our 3-year production guidance while we assess the long-term impact of COVID-19 pandemic on our business and as we work to incorporate Detour Lake into our long-term business plan. When we discuss COVID-19, we don't talk about returning to normal because we are not sure what normal will be in the future. There are a lot of moving parts. There is no question that there will be some impact on how our business is done. This is a key reason why we have suspended our 3-year guidance.

The world is going to be a different place because of COVID-19, particularly if there are additional waves of virus that occur. We are not going to take some -- we're going to take some time to consider what work is likely going to look like in the future, what impact it will have on our operations, but our priority is to look after our people and the communities and the sustainability of our business beyond this period of time in this pandemic.

Slide 7 looks at another key very important developments for Kirkland Lake Gold during Q1 2020, the acquisition of Detour Lake Gold. We have talked about the deal at length, and so I won't get into the terms and rationale behind the transaction. We see a lot of upside at Detour Lake and plan to invest aggressively to achieve it. We actually are not disappointed at all in terms of what we see as the potential here and the quality of the people that are at Detour and the ability for us to move this project forward to a whole new level.

We will highlight a few things about the quarter. Given that we own Detour Lake for 2 months, it was on reduced operations for part of that time. You get a sense that had very, very good operating performance, producing 92,000 ounces in 2 months ending March 31, cash cost of $696 and all-in sustaining costs of $1,108 per ounce were in line with expected levels for the quarter -- or for the period. During the quarter, we saw the tremendous leverage Detour Lake has on the gold price. Already mentioned a $78 million of free cash flow generated in 2 months, and that was about 40% of our total free cash flow for the quarter excluding nonrecurring items of the company.

The last key development I'll mention for the quarter involves the noncore assets. I am on Slide 8. On February 20, we designated our Holt Complex and assets in the Non Territory -- Northern Territory, sorry, as noncore. The Holt Complex includes our Taylor, Holt and Holloway Mine and Holt mill in Northern Kirkland Lake. In March, we placed the Holloway Mine in care and maintenance. We also suspended all test mining and processing at the Cosmo Mine and Union Reefs mill in the Northern Territory of Australia and also cease all exploration drilling here.

The results we were getting from both Holloway Mine and the NT did not just by continuing on with our operating activities, particularly when you consider potential we have at our 3 cornerstone assets, Macassa, Detour Lake and Fosterville. At the beginning of May, we transitioned the remainder of the Holt Complex to temporary care and maintenance. The move was done as part of our COVID-19 protocols and also reflected the fact that we're in the midst of a strategic review of the operations. We decided that while we perform that review in light of the COVID-19 pandemic, it makes sense to continue to suspend the operations here. We originally indicated that the temporary suspension will last until April 30. That has now been extended, and we have not determined the time line for resumptions of operation at this time.

Turning to Slide 9. I mentioned the tremendous growth and exploration potential of our 3 cornerstone assets. We plan to invest aggressively to realize all the upside we see. Even with COVID-19, we had exploration expenditures of $36 million in Q1 2020. We did largely suspend drilling late in the quarter but are starting to redeploy drills now. We have already announced some encouraging drill results, identifying a new large quarter of high-grade mineralization at Macassa, along the Main Breaks at that depth. Eric Kallio will tell you more about these exploration results shortly. And when you go through the exploration part of this presentation, and if we give you a sense, I mean, exploration is one of the most exciting parts of this company, not just at Macassa but also at Fosterville -- or and a lot at Fosterville. And as Eric will show you, over time, a lot at Detour Lake.

Anyway, right now, I'd like to call on David Soares, our CFO, to review our Q1 2020 financial results in more detail.

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David Soares, Kirkland Lake Gold Ltd. - CFO [4]

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Thank you, Tony, and good afternoon, everyone. I'll be starting on Slide 10. As Tony mentioned, we had strong earnings in Q1 2020. Net earnings totaled $202.9 million or $0.79 a share. Adjusted net earnings were $179.2 million or $0.70 per share. The difference between adjusted net earnings and net earnings related mainly to a $52.5 million after tax of foreign exchange gains due to the strengthening of the U.S. dollar in the quarter. This impact was partially offset by the exclusion from adjusted net earnings of $24.9 million after tax related to transaction costs related to the Detour Gold acquisition.

In terms of key drivers of adjusted net earnings, it largely came down to strong revenue growth driven by both higher sales volumes and increased gold prices in the quarter. The change in earnings per share from both Q1 2019 and last quarter, Q4 of -- or sorry, Q1 of 2020 was impacted by higher average shares outstanding in Q1 2020. They totaled $257.4 million this quarter versus about $210 million in both prior periods. The increase related to the 77 million shares we issued for the Detour transaction on January 31 partially offset by the 9.7 million shares we repurchased in Q1.

Slide 11 looks at our revenue in more detail. Revenue in Q1 2020 totaled $554.7 million, 82% higher than Q1 2019 and a 35% increase from the previous quarter. On a year-over-year basis, both higher gold sales and an increase in gold price contributed to the strong revenue growth. Gold sales increased 48% to 344,000 ounces and had a $146 million favorable impact on revenue. The average gold price increased to $1,586 per ounce from $1,307 per ounce a year earlier. The increase in price increased revenue by $96 million in the quarter.

Quarter-over-quarter, gold sales were 24% higher, which increased revenue by $98 million. The Q1 2020 gold price compared to $1,481 per ounce in Q4 2019. The increase in price had a $36 million favorable impact on revenue this quarter.

Detour Lake had a significant impact on revenue in Q1 2020 contributing $179.4 million of the $554.7 million of total revenue. Gold sales at Detour Lake were just over 110,000 ounces. Excluding Detour Lake, revenue totaled $375.3 million compared to $304.9 million a year earlier and $412.4 million in Q4 of 2019. You may recall that in Q4, we had record sales driven by Fosterville, which had a grade of almost 50 grams per tonne for the quarter.

Looking ahead at EBITDA, as shown on Slide 12, Q1 2020 EBITDA was a record $391.5 million, a 94% increase from $201.6 million in Q1 2019 and 37% higher than $285.6 million in the previous quarter. The increase from both prior periods was driven by net earnings growth as well as the impact of higher depletion and depreciation costs and current income tax expense.

Turning to Slide 13. It looks at our cash and cash flows. On the slide, you will see that we have adjusted opening cash flow to net out $60.5 million of nonrecurring items. These are mainly related to the Detour Gold acquisition and include transaction fees, change of control payments and other termination-related costs and some restructuring expenses. We also have about $3 million of restructuring costs at the KL level and incurred some severance expense at our noncore assets, mainly in the Northern Territory. Excluding the nonrecurring costs, our cash from operations totaled $302 million.

Looking at investing activities, we have a source of cash of $60.7 million, which mainly reflected cash received from Detour Gold, offset by capital expenditures. As Tony indicated earlier, the cash we received from Detour was more than offset by uses of cash relating to the transaction or the acquired company. Turning to finance activities, the large use of cash related to a few things, the largest being the share repurchases in the quarter.

Moving on to Slide 14 where we look at the change in cash in a slightly different way. You can see that the largest contributor to growth in cash was from our operations, which generated about $282 million. This is before interest, income tax paid and impact of changes in working capital. The other large source of cash was the $173.9 million of cash obtained from Detour Gold. We have already discussed it in this slide, and this slide gives the details around the offsetting uses of cash relating to Detour. We used $98 million to repay Detour's debt, $30 million to close out its hedge positions and also had $54 million of transaction and restructuring-related cost paid in cash in the quarter.

The chart on Slide 14 also highlights the significance of the $330 million used for share repurchases during the quarter on our cash balance. Other significant uses of cash in the quarter included about $110 million of capital expenditures, about $90 million of which was sustaining. We also had higher cash income tax payments, and we paid $12.5 million in dividend payments based on a Q4 2019 dividend of $0.06 per share. As you've heard, we've doubled our dividend in Q1 to $0.125 per share. So going forward, that cash commitment for dividends will be higher.

With that, I'll turn the call over to Duncan King, Vice President of Australian Operations.

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Duncan King, Kirkland Lake Gold Ltd. - VP of Mining for Kirkland Lake [5]

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Turning to Slide 15. Good afternoon. As Tony mentioned earlier, Fosterville had a strong quarter in Q1 2020. We produced 160,000 ounces. Production increased 24% from Q1 2019, with the increase resulting from a 46% improvement at the average -- in the average grade to 42.4 grams to the tonne. The higher average grade resulted from increased mining in the Swan Zone compared to the prior year.

Production in Q1 compared to record production in Q4 2019 of 192,000 ounces, when the mine achieved a record grade of 49.3 grams to the tonne. The grade in Q4 reflected sequencing in the Swan Zone as well as some grade outperformance during the quarter.

Cash costs in Q1 2020 were $126 per ounce, 13% better than $144 per ounce in Q1 2019. Q1 cash cost compared to a record $106 per ounce in Q4 2019. Again, largely reflecting the average grade in the previous quarter. All-in sustaining costs averaged $313 an ounce in Q1 2020 versus $315 in Q1 2019 and $258 the previous quarter. It is worth noting that a new royalty introduced by the Victorian government, effective January 1, 2020, accounted for $7.2 million or $47 an ounce of all-in sustaining cost in Q1 2020. Excluding the new royalty, these costs were largely unchanged quarter-over-quarter.

Looking at our projects, while Fosterville has continued to operate through the COVID-19 crisis, we did have some projects impacted when we suspended all nonessential work. Work on our new ventilation system was interrupted, as were a number of surface infrastructure projects. We continue to target commissioning of the new ventilation system beginning in the second quarter, and our project work is starting to come back online.

I'll now turn the call over to Evan Pelletier, General Manager, Kirkland Lake Operations.

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Evan Pelletier, Kirkland Lake Gold Ltd. - General Manager of Kirkland Lake Operations [6]

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Thanks, Duncan. I'm starting on Slide 16. Macassa had a solid quarter in Q1 2020. We produced 51,000 ounces, which compared to record quarterly production of 73,000 in Q1 2019 and 56,000 ounces in the previous quarter. The quarter-over-quarter change largely related to lower tonnages, which was due in large part of disruptions caused by COVID-19.

Operating cash costs averaged $536 per ounce in Q1 2020 versus $332 in Q1 2019 and $471 per ounce in the previous quarter. The increase from both prior periods largely reflected lower sales volumes as well as higher levels in operating development and other mining costs in Q1 2020. All-in sustaining cost per ounce averaged $850 versus $602 in Q1 2019 and $721 in the previous quarter. The year-over-year change was mainly due to lower sale volumes. The change from Q4 2019 was due to lower sale volumes as well as higher operating costs and increased sustaining capital expenditure. Sustaining capital of $15.1 million was higher than $10.8 million in Q4 2019, which was the lowest quarterly total we had last year. It was largely timing related in terms of schedule and capital development and equipment procurement.

Before I get to #4 Shaft, I'll first address our plans around COVID-19. We are resuming work on key projects and starting to ramp up production. We resumed shaft sinking at the end of April and have also commenced work on a new surface ramp. Increasing production activities will be a gradual process. We are maintaining all of our key health and safety protocols, including limited people on-site and social distancing. This will continue to impact our operations for some time.

Turning to Slide 17. We have made a great deal of progress at the #4 Shaft project and now have made changes to the project scope and schedule. First, during Q1, we sank the shaft to 760 feet to the 1960 level at quarter end. And this is fully equipped with steel and concrete. We also excavated and equipped the 1540 level station. At the end of March, we stopped sinking as part of COVID-19 protocol to suspend nonessential work. That lasted about a month. And we started sinking again in late April.

Based on the progress we have achieved, we have made changes to the scope and schedule of the shaft project. We are now planning to complete the shaft in one phase to a total depth of 6,400 feet with target completion for late 2022. The changes to the shaft scope benefit in a number of ways. This allows us to increase skipping capacity sooner, improves ventilation and working conditions, derisk the mining advances, the timing for future exploration development of the shaft and support to future drilling. By reducing the development period by over a year, we'll be able to use the shaft sooner and have created a potential for our cost savings in the capital budget. At this time, however, our budget remains at $321 million.

I'll now turn the call over to David Londono, General Manager of Detour Lake.

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David Londono;Detour Lake;General Manager, [7]

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Thank you, Evan. Good afternoon, everyone. I will be talking to Slide 18. Detour Lake produced 91,000 ounces from January 31 till the end of the first quarter. We processed 3.7 million tonnes at an average of 0.84 grams per tonne. The average grade was down from the previous quarter, mainly due to processing higher volumes of stockpile material, which is typically lower grade than mine production or direct grade. Operating cash costs averaged $696 per ounce in Q1 2020, while all-in sustaining costs averaged $1,108 per ounce. Sustaining capital totaled $48.2 million. As we have mentioned previously, all of the Detour Lake's capital is reported and sustaining. So our AISC cost is -- of $1,108 is really all-in sustaining costs, all-in costs.

In our conference call in April, I spoke at length about the health and safety protocols we put in place in response to COVID-19. Today, I'll provide an update. We have commenced ramping up our mining production starting with drill and blast and then moving on to load and haul and direct mining fleet to the crusher. For this ramp up, we are requiring masks on our buses coming from and to Kirkland, performing temperature checks prior to employees leaving Kirkland by bus and on others arriving by truck to the gatehouse. Temperature checks are also being performed at camp before starting shifts. 4 body heat cameras were recently purchased and installed in strategic locations at the Kirkland bus terminal, both camps and at the gatehouse. So body temperature is now checked every time a worker passes through these locations.

If someone is not feeling well or shows any of the COVID-19 symptoms, they are assessed by a -- the medic and then sent outside for precautionary measures. We're continuing also with physical distancing at camp; on the buses, we doubled the number of buses; in live vehicles; meeting rooms and at the dining rooms. We also have removed some chairs to keep social distance in the mess, and we have blocked some of the areas. We put some signage, et cetera.

With that, I'll turn the call over to Eric Kallio, Senior Vice President of Exploration.

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Eric A. Kallio, Kirkland Lake Gold Ltd. - SVP of Exploration [8]

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Thanks, David, and good afternoon, everyone. I'll be starting with Slide 19, which is a plan for the Macassa Mine, which is the main focus for Q1 exploration and where we recently announced more exciting news from drilling.

As indicated in the plan, drilling was focused in the east part of the mine and on testing the SMC but also included new work on the Main Break. For the SMC, we had 18 new holes and continued to obtain very positive results with a number of new high-grade intercepts and another 75 meters of strike lengths added to the structure. With this now, we bring the total length of the structure of the SMC to over 2 kilometers and still open for more expansion.

And then in terms of the Main Break, we had one more new hole and 15 others that were not previously reported that we now interpret as part of a new high-grade corridor. As indicated in the release, the corridor extends between our new #4 Shaft and Kirkland Minerals and currently measures 700 meters long by 300 meters high. Of importance for future development, the corridor is also located very close to a new drift planned on 57th level.

And in terms of the new hole, it intersects the East part of the corridor, 300 meters below the deepest level at Kirkland Minerals and 50 meters East of the closest previous hole in this area. It also has one of the highest grades to date from this zone and a little to no drilling to the East. So again, open for expansion.

Turning now to Slide 20. We can see a cross-section through the East part of the area drilled and further illustrating the new results. As indicated, the SMC is located on the left-hand side and just below the drill platform on 5300 and has a number of good holes to both confirm and extend the zone. And the Main Break is on the right-hand side and hosts the continuous string of values extending downward from the historic workings at Kirkland Minerals. Additional to this, the section also provides another view of the new high-grade intercept in hole number 4052, which is located near the 6800 level or 300 meters below the deepest level at Kirkland Minerals.

And now turning on to Slide 21. We see here a long section for the Main Break and the high-grade corridor, which, as indicated, contains a number of very good intercepts altogether, and all of them located between the new #4 Shaft and Kirkland Minerals. Although the number of holes drilled is still quite low at this point, we are very encouraged by the overall continuity and number of high grades that we see in this area to date.

We're also very encouraged by the fact our new high-grade intercept is at the East limit of the drilling with little to no testing beyond this. And from what we know, the structure in this area is still likely open for testing all the way to Lake Shore Mine, which is at least another kilometer to the East. So considering all the above, I think it's fair to say, we continue to feel strongly about the potential to mine and looking forward to doing more exploration here very soon.

And with that, I'll now pass the call back to Tony.

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Anthony Paul Makuch, Kirkland Lake Gold Ltd. - President, CEO & Director [9]

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Okay. Thanks, Eric. Pretty exciting in terms of some of the developments there at Macassa. Anyway, maybe on just the final Slide 22. I'll just give you some highlights here or summary highlights. And I guess you can start to get a sense for, despite a challenging environment in Q1 2020, Kirkland Lake continued to turn in a strong quarter. We had solid earnings, generated substantial free cash flow in the quarter. We maintained our industry-leading financial strengths, and we also returned capital to shareholders, probably the highest level of capital return to shareholders in a quarter and anyone in our industry. And through -- and we did this through extensive share buybacks and by doubling our quarterly dividend.

We had a very strong first 2 months from Detour Lake, and we're very pleased with the progress we see in terms of improved productivity and really in terms of the upside of this operation. We also took steps during the quarter to streamline our portfolio to focus more fully on our 3 cornerstone assets despite turning -- making both the Northern Territory in Australia and our KL North assets as noncore at this point in time. We continued to invest aggressively in exploration and believe that with Macassa, Detour Lake and Fosterville, we have 3 of the most exciting exploration projects in the industry. And I had somebody, when I'm talking to and say really and truly, Kirkland Lake Gold is an exploration company that happens to mine and generate free cash flow.

Finally, I'd say we are cautiously optimistic that conditions are improving in terms of COVID-19 and is starting to resume work in key areas. This will be a gradual process extending throughout the year. We also recognize that some changes may become a new normal and everything we do, the health, and well-being of our workers, their families and our communities will remain our top priority.

Thanks, everyone, for listening on this call. Thank you for staying home, staying safe, looking after your families. And fundamentally, if we all look after ourselves and our families, we're all looking after each other too. So thank you for what you've done.

Anyway, we'll be happy to take your questions at this time.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Fahad Tariq of Crédit Suisse.

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Fahad Tariq, Crédit Suisse AG, Research Division - Research Analyst [2]

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On the 3-year production guidance that was withdrawn, can you give some more color on the long-term impact that you're seeing from COVID-19? Is it on productivity, supply chain? Just trying to get a sense of what is causing you to, I guess, revisit the longer term guidance as a result of COVID?

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Anthony Paul Makuch, Kirkland Lake Gold Ltd. - President, CEO & Director [3]

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Well, I think -- I mean, there's a lot of moving parts. We don't know where things are going to happen. We don't know what -- as government is going to lift restrictions, we don't know what's coming on. And we decided it's prudent to sit there and say, you know what, there's no use trying to commit to things in year -- in 2021 and 2022. We still don't know where this is -- where it's going on. We definitely see that there will be differences in our operating practices, in use of PPE and work schedules, et cetera. Some of it is -- we see as being -- maybe becoming some of the new norm in terms of how people will work. So we've got to consider that and really get an understanding of where things are going to go over the next few years. So that's all. Just give yourself some time to really understand and reposition the operations.

We've also, as Evan mentioned, with the #4 Shaft, I mean it also gives you time. We relooked at things we're doing. And we say, like as an example, with #4 Shaft, where instead of saying it's going to be done at the end of 2023, we can do it in 2022. We've had some time to rethink things. So it gives us some time to rethink all of our business model, et cetera, and incorporate what's going on with Detour, what we really want to do at KL North at this point in time. So that's what we decided to do as opposed to coming up with a variety of changes over the next 3 months or 6 months that we didn't quite -- we might not be able to predict.

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Fahad Tariq, Crédit Suisse AG, Research Division - Research Analyst [4]

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Okay. And just as a follow-up on the Macassa Shaft 4, now that the depth has been revised, what does that mean? I know you can't -- you probably can't give specifics, but what does that mean just in terms of the production relative to what it was previously expected to be? Like how does that change in the depth of the scope of work impact production and the fact that it's coming back a year?

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Anthony Paul Makuch, Kirkland Lake Gold Ltd. - President, CEO & Director [5]

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It doesn't necessarily -- well, I mean it doesn't necessarily change much on production. It has -- it brings a little bit more production into potentially 2022 than we had in our plan. I think it really -- it does help us in terms of focusing on costs and productivity improvements and operational improvements and work conditions that previously maybe not be there. So at this point in time, we're not necessarily saying it's going to help us and we're going to increase the production because of it, but we see it as definitely it's going to derisk production, it's going to derisk the operation and it's going to provide a better, safer workplace quicker. And we're going to do it at less capital costs. So we're not really ready to execute what it is, but there will definitely be no cost overrun on that shaft. Is that a good answer to your question?

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Fahad Tariq, Crédit Suisse AG, Research Division - Research Analyst [6]

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That's very helpful. Thank you.

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Operator [7]

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Your next question comes from the line of Cosmos Chiu of CIBC.

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Cosmos Chiu, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research & Equity Research Analyst [8]

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It's great to see that you've talked about ramping up Macassa and Detour starting in early May. If I remember back in April during the conference call, you had talked about Detour, the ramp-up could take a month or 1.5 months. I think David mentioned that. And Evan had mentioned that Macassa could be 3 to 4 weeks. But in today's conversation, it seems like it could take longer. Tony, in your opening remarks, you talked about, could be a year. Has that changed? Or could you help me sort of reconcile?

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Anthony Paul Makuch, Kirkland Lake Gold Ltd. - President, CEO & Director [9]

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Excuse me. No. I don't -- nothing has really changed. I guess we're just trying to -- the only thing that's changed from, say, a month ago versus now is the -- when you're reading about what's happening and getting a sense on where government lifting is going as well as understanding the practices and how they're being adopted in the workplace and what might be the new norm, we're starting to be realistic in saying, "Hey, you know what, some of this stuff may at times take a little bit longer and/or have a longer term impact." I would sit there and say, "I'm not sure that I'm going to be going to a hockey game and sit in the crowd of 20,000 people at the Scotiabank Center and to see drama play. No offense, but am I going to do that in September?" So there's a lot of things that are starting to happen, and we're just trying to gauge that. We don't -- it's just us taking a little longer term view and looking at risks, et cetera, and what potentially might happen.

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Cosmos Chiu, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research & Equity Research Analyst [10]

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I guess, again, as a follow-up on the last conference call, you had mentioned Detour was running at about 75 -- 35% of your normal sort of workforce. Macassa was running at about 65%. Where are you at right now? And -- I guess, where are you at right now?

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Anthony Paul Makuch, Kirkland Lake Gold Ltd. - President, CEO & Director [11]

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I'll let David Londono, he can speak for Detour, and let Evan Pelletier speak for Macassa. How does that go? David, do you want to go first?

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David Londono;Detour Lake;General Manager, [12]

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Yes. I'm going to go first. So at Detour, at the mine, at this moment, we're above 50% of the mine and 75% of the mill. By the 18th of May, more or less, we're going to be 85% at the mine and then we're going to be full production at the mill. And again, as Tony mentioned, the plan is to maintain social distance at both mess halls. And so going to 100% is going to be more difficult at this time. So I would see how this thing progresses. But the idea is to at least go 85% of the mine.

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Evan Pelletier, Kirkland Lake Gold Ltd. - General Manager of Kirkland Lake Operations [13]

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For Macassa and Cosmo, basically sitting at about 80%, 85% now. So we're up from 65%. But we're still seeing some absenteeism due to COVID.

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Cosmos Chiu, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research & Equity Research Analyst [14]

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For sure. And then just a quick follow-up...

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Anthony Paul Makuch, Kirkland Lake Gold Ltd. - President, CEO & Director [15]

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Part of it in Cosmo is people has to come back to work, right? So...

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Cosmos Chiu, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research & Equity Research Analyst [16]

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For sure. And then just a quick follow-up, if I may. The -- again, on the 3-year guidance, to be honest, I was a bit surprised that it was withdrawn. But I think, Tony, you explained it well in terms of sort of what's happening. But if I were to look at your 3-year guidance that was put out at the end of 2019, it was focused on Fosterville and Macassa. But also today, you also mentioned Detour and how that fits into the longer term mine plan. I'm just wondering the impact here from COVID-19 and the decision to withdraw the 3-year guidance, was it based on -- more on what's happening at Fosterville and Macassa? Or is it overall?

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Anthony Paul Makuch, Kirkland Lake Gold Ltd. - President, CEO & Director [17]

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I think it's already -- I don't think I noted, it's overall, Cosmos. And I mean part of our -- when we give our production guidance, part of it is all tied into where we see capital programs going, where we see exploration programs going, et cetera. And there's a lot of inputs that come into it. We just -- we basically decided that we need to spend a little bit of time reviewing things and really understand what's going to happen. We don't know what's going to happen in September or October of this year. We don't know how things are going to progress, and we're just trying to provide some guidance in that sense.

I mean we said what we were doing this year. We indicated -- you can see what we did in Q1 compared to plan. We'll continue to report on a quarter-by-quarter basis in terms of how we did compared to the prepared plan for the year. We just don't know if something is going to come out at us. And that's where we're just trying to not sit there and say, well, we're going to do this, and then 3 months later, I have to say we're going to do this. We think once we get everything to more predictable levels as well as get some of this stuff behind us as well as understand the impact of a lot of new protocols and processes we're running and the potential impact on any potential capital programs we might want to implement or exploration programs, we decide what to do. We just give ourselves a few months to take that on.

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Operator [18]

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Your next question comes from the line of Ovais Habib of Scotiabank.

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Ovais Habib, Scotiabank Global Banking and Markets, Research Division - Research Analyst, Mining [19]

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Just a couple of questions from me. Tony, just starting off with, again, just a follow-up on Cosmos' question on the guidance-wise. Is there anything specific you are looking for before you get comfortable in providing 2020 guidance? I mean you were talking about Macassa and kind of Detour moving closer to that anywhere from 60% to 85% mark. I mean is there something more of a sustainability side that you're waiting for before you can move forward with just at least the specific 2020 guidance?

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Anthony Paul Makuch, Kirkland Lake Gold Ltd. - President, CEO & Director [20]

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I think it's -- I mean we're recalling people. We're moving back up people, but so are our suppliers, and so are the communities. So it's all sort of fitting into trying to get some sense on how things are progressing over the next few months and ensuring that nothing changes in terms of government protocols that come on us. I -- we have -- we don't want to work without a plan. We don't want to work haphazardly. So we're -- we've got a plan, and we got ideas of what we're doing. And as soon as we feel pretty comfortable, as we said earlier, as soon we're at predictable levels, say, for 2020, we'll be able to say it. And if nothing changes from what we see it progressing over the next while, we definitely feel by the end of Q2, we'll be able to say what 2020 is going to look like, right? I mean part of our 2020 guidance isn't just production. It's also costs, et cetera too, right?

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Ovais Habib, Scotiabank Global Banking and Markets, Research Division - Research Analyst, Mining [21]

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For sure. And just -- I mean in terms of Fosterville then, I mean, in terms of operations continued and continued through Q1 and continue unaffected, maybe you pulled back a little bit on development and exploration. But is that -- do you feel that's impacting maybe the 2- or 3-year guidance that you have provided previously?

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Anthony Paul Makuch, Kirkland Lake Gold Ltd. - President, CEO & Director [22]

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Fosterville performed extremely well in Q1, and predictions for Q2 would mean that things seem to continue to go like that could be very well. I mean we are assessing Fosterville in terms of what's going on, just like we're doing with the other mines. We're trying to take the position on what we see and what is the work we're doing and what do we see as a long-term sustainable future there than what we have. And definitely, exploration success is a key driver to what's going to happen at Fosterville, right?

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Ovais Habib, Scotiabank Global Banking and Markets, Research Division - Research Analyst, Mining [23]

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Got it. And just one quick question. Just in terms of percentage coming from Swan in Q1, if you could just remind us what that was, and is that percentage expected to change over the next couple of quarters or significant quarters?

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Anthony Paul Makuch, Kirkland Lake Gold Ltd. - President, CEO & Director [24]

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Duncan -- look, I don't have those numbers. I had those numbers. I don't remember what they are. Duncan, do you have the -- in terms of percentage from Swan and in terms of going forward for the year? Anyway, it's pretty much consistent. But if Duncan has the answer for that, I can have it. If not, I can get you off-line in terms of what the percentage was from Swan. Probably 75% from Swan?

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Duncan King, Kirkland Lake Gold Ltd. - VP of Mining for Kirkland Lake [25]

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I think it was 80% from Swan.

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Anthony Paul Makuch, Kirkland Lake Gold Ltd. - President, CEO & Director [26]

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Yes.

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Duncan King, Kirkland Lake Gold Ltd. - VP of Mining for Kirkland Lake [27]

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And it's expected to be consistent the remainder of the year.

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Operator [28]

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Your next question comes from the line of Josh Wolfson of RBC Capital Markets.

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Joshua Mark Wolfson, RBC Capital Markets, Research Division - Analyst [29]

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First question relates to Macassa. I assume there would have been a pretty reasonable sort of study that was done on the shaft expansion, what the long-term cost projections are for the mine beyond just what the production volumes are, which have been guided. Can you provide some additional detail on what you expect the steady-state sustaining capital and unit cost expectations to be once the project is ramped up and maybe based on the old study and -- what the opportunity could be from what the discussion was earlier this call about potential improvements?

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Anthony Paul Makuch, Kirkland Lake Gold Ltd. - President, CEO & Director [30]

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Yes. I mean that's a -- it's -- in terms of -- for this call, I don't know if we have those answers available, but we're happy to share them with you and give you some sort of guidelines. I mean I don't think that it's much anything different than what we've been sort of achieving or what we had guided to previously. The old issue with the shaft and part of the changes in the shaft, by the way, is we originally started the shaft development using a contractor and it being a contracted item. And back in September of last year, we took over from the contractor ourselves and started developing it ourselves. And with that, we've started to rethink the scope of the project and the timing of the project and the cost of the project. And that's pretty much what's happening there.

How it affects the mine plan and that -- those are moving parts over time. And part of it is getting that shaft a lot earlier is really going to help in terms of derisking that operation and improve working conditions in the mine. But in terms of those numbers, I can get Natasha to speak to you after. There's a lot more numbers than we have sitting. I appreciate we're all in different home offices and scattered across the province of Ontario, right?

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Joshua Mark Wolfson, RBC Capital Markets, Research Division - Analyst [31]

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Great. And then the second question, back to the comments seen here on the guidance. It sounds like over the next quarter, there will be some more information in terms of what the 2020 expectations will be. But reasonably, with the 3-year guide, there's a reasonable amount of more work required for the Detour plan as well as with the Fosterville and Macassa sort of outlook is going to be. When do you think we'll have enough information to actually formally provide that for your guidance? Is it going to be realistically not until early 2021? Or will we have to kind of meet your update where the clarity can be better understood?

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Anthony Paul Makuch, Kirkland Lake Gold Ltd. - President, CEO & Director [32]

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I think with the Detour approach, Detour and trying to get a handle on the plan at Detour, we were looking at trying to have something out by Q2 into Q3 of this year. That some -- so part of that was really trying to really do that right. We wanted to be able to incorporate some new drilling results and reinterpretation of geology and the resource there and a few other things from a permitting perspective that we've applied for. Some of it recognized has been delayed now. I'd say a lot of parts of that work has been delayed because of COVID-19. But I would say that we're really working towards probably by Q4 of this year to really have that something solid out there. But if we get it sooner, we will get it out sooner.

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Operator [33]

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There are no further questions at this time. I turn the call back to Mark Utting.

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Mark E. F. Utting, Kirkland Lake Gold Ltd. - VP of IR [34]

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Thank you, operator, and thanks, everyone, for participating in our call today. As you heard, despite the COVID-19 pandemic and responses we've had, we had a solid quarter in Q1 with very solid operating results, earnings and very solid cash flow. We have some exciting things going on with our projects. We're advancing the #4 Shaft at Macassa very well, and we're realizing some of the exploration upside we've talked about with some very encouraging results at Macassa this quarter. We'll continue to update the market as developments occur and as we continue to progress our operations and ramp up. And we look forward to our next conference call when you can -- we can talk again about our ongoing solid results. Thanks very much.

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Operator [35]

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Ladies and gentlemen, this concludes today's conference call. Thank you for participating, you may now disconnect.