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Edited Transcript of KL earnings conference call or presentation 6-Nov-19 9:00pm GMT

Q3 2019 Kirkland Lake Gold Ltd Earnings Call

VANCOUVER Nov 26, 2019 (Thomson StreetEvents) -- Edited Transcript of Kirkland Lake Gold Ltd earnings conference call or presentation Wednesday, November 6, 2019 at 9:00:00pm 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

* Eric A. Kallio

Kirkland Lake Gold Ltd. - SVP of Exploration

* Ian Holland

Kirkland Lake Gold Ltd. - VP of Australian Operations

* Mark E. F. Utting

Kirkland Lake Gold Ltd. - VP of IR

* Natasha Nella Dominica Vaz

Kirkland Lake Gold Ltd. - VP of Technical Services

* Troy Fuller

Kirkland Lake Gold Ltd. - Director of Exploration in Australia

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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

* Craig Philip Stanley

Eight Capital, Research Division - Principal for Metals and Mining Research

* John Charles Tumazos

John Tumazos Very Independent Research, LLC - President and CEO

* Michael Parkin

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

* Ovais Habib

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

* Steven Howard Butler

GMP Securities L.P., Research Division - MD of Equity Research & Gold Analyst

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Presentation

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Operator [1]

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Thank you for standing by. And welcome to the Kirkland Lake Gold Third Quarter 2019 Conference Call and Webcast. (Operator Instructions) Please be advised that today's conference is being recorded.

I would now like to hand the conference over to Mark Utting, Presenter, Vice President of Investor Relations. Please go ahead, sir.

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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. That's good afternoon for everyone in North America, where actually, it's good morning for us. We're doing the call from our new offices in Melbourne today.

With me are many members of the Kirkland Gold management team. Those presenting will include Tony Makuch, our President and Chief Executive Officer; David Soares, our Chief Financial Officer; Ian Holland, our Vice President, Australian Operations; Natasha Vaz, our Vice President of Technical Services; Eric Kallio, our Senior Vice President of Exploration; and Troy Fuller, our Director of Exploration for Australia. As I mentioned, there are several other members of the management team in the room as well.

Today, we'll be providing comments on the results for the third quarter and first 9 months of 2019. After the presentation, we'll open the call to questions. The slide deck that we'll be referring to is on the webcast. It also is posted to our website at www.klgold.com.

Before we get started, I'd like to draw your attention to the forward-looking statement slide, which is Slide 2 on the deck.

Our remarks and answers to questions may and likely will contain forward-looking information about future events and the company's future performance. Please refer to the detailed cautionary note on the slide as well as the forward-looking information set out in the news release announcing our third quarter results.

Also, during today's call, we'll be making reference to non-IFRS measures. A reconciliation of these measures is available within the third quarter and first 9 months of 2019 MD&A, which is posted on our website as well as SEDAR.

Finally, please note that all figures discussed today will be in U.S. dollars, unless otherwise stated.

With that, I'd like to turn the call over to Tony Makuch, our President and Chief Executive Officer.

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

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Okay. Thanks, Mark, and thanks, everyone, for being on the call. As stated in our release today, the company had a very solid third quarter, and the company continues to deliver industry-leading results.

But before we start the presentation to explain the performance in the quarter, maybe let's first take the time to acknowledge the people at Kirkland Lake Gold, including the families, our suppliers, service providers and the communities that support us. We get to talk about our accomplishments, and they are the ones that make things happen for us. So thank you very much, and I look forward to a continued safe working in Q4 and finishing off the year.

Now turning to Slide 3. The company reported record results in Q3 2019 in production, unit costs, earnings and cash flow. Production for the quarter was 248,000 ounces, cash cost of $287 an ounce and all-in sustaining costs were $562 per ounce. Earnings per share for the quarter was $0.84. Operating cash flow in the quarter was $317 million or $1.33 per share before changes in working capital. And very importantly, we added $146 million of cash, internally funding our growth.

Looking at year-to-date on Slide 4. Results for the first 9 months of 2019 were very strong also. Production just sits under 700,000 ounces year-to-date. Costs are tracking well and are industry-leading with cash costs of $296 per ounce and all-in sustaining cost of $584 per ounce. Earnings per share year-to-date is $1.86. Free cash flow sits at $330 million. And on a year-to-date basis, we've increased our cash by over $280 million or 85%. Cash at the end of September 30, 2019, totaled $615 million and it continues to grow in Q4.

Turning now to Slide 5. Something of what happened in the quarter, our 2 high-grade low-cost mines performed very well. Fosterville continues to deliver exceptional results, had record production of 158,000 ounces driven by continued improvements in the average head grades as well as higher tonnage compared to the previous quarter. In all-in, we'll get more into the details of this later.

Macassa also had a strong quarter in Q3. Tonnes processed increased 18% from Q2 and grades improved from both Q3 last year and last quarter. Fosterville and Macassa continued to demonstrate to us that they are exceptional mines with significant growth ahead of them.

Now turning on to our guidance slide on Slide 6. And looking at our guidance, we continue to target 950,000 to 1 million ounces of consolidated production for the year. We have reduced our production guidance for Holt Complex. We have and we expect both Fosterville and Macassa to have strong final quarters of the year, which will allow us to end the year comfortably in our guidance range.

Looking at Holt. We announced in early October that we are reviewing future plans at the Holt Complex. We have royalties to [contend] with at Holt that limit our willingness to invest here. We need to resolve those issues and do a lot more drilling at all 3 mines. As mentioned, we are looking at best -- at the best way to proceed here.

Looking at some of our other guidance. We have revised our capital expenditure guidance. Sustaining capital will be higher largely due to additional development at Fosterville and Macassa to support growth. This which was included -- which included adding equipment and enhancing infrastructure at the mines. Growth capital expenditure guidance has increased also, normally relates to the advanced expenditures at the #4 shaft project at Macassa.

Basically, what was happening here is taken over from the general contractor on-site and we're now self-performing -- to do self-perform the development of the shaft ourselves. And as a result, we had -- we purchased the sinking plant and related equipment from the contractor and [get] purchases now as opposed to spreading it over the life of the project than on a rental basis. We don't expect this to have any impact on the planned capital cost estimate and/or schedule as we go forward.

Also, exploration guidance is higher, and that really refers -- relates to the progress in the Northern Territory. We have started to test processing at the Union Reefs mill and expect to produce over 10,000 ounces this quarter. This will not be commercial production. It is fair to say, however, that we are making good progress towards the restart decision in the NT.

Turning to Slide 7. With strong financial results and a growing cash position, we are continuing to increase the amount of capital we return to shareholders. We announced a 50% increase in the common share dividend to $0.06 per share effective to Q4 2019 dividend data. This will be the fifth increase in the dividends since it was introduced in March 2017. Higher dividend payments support our efforts to generate strong returns for shareholders. We continue to have considerable success with our share price also, up about -- over 70% year-to-date in 2019.

With that, I'll turn the call over to our CFO, David Soares.

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

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Thank you, Tony. Good morning, everyone. As Tony mentioned, we had record earnings in Q3 2019. Net earnings totaled $176.6 million or $0.84 per share. Earnings increased over 200% from $55.9 million in Q3 2018 and were 69% higher than the previous quarter. By far, the most significant factor driving earnings growth was increased revenue driven by higher sales and an increase in the gold price. We also had a foreign exchange gain of $13.7 million pretax in the quarter, which reflects the weakening of the Aussie dollar to the U.S. dollar. In addition, we had lower expensed exploration costs compared to Q3 2018. And this is because we are capitalizing more of our exploration costs than we did in the past.

If you look at our per share earnings quarter-over-quarter, we closed Q2 at $0.50 a share and closed the third quarter at $0.84 a share. The sales volume, a positive variance of $0.19 a share, was the main factor driving that increase. As well, we had $0.14 a share improvement in the gold price and $0.06 a share in the foreign exchange gain.

Turning to revenue. We achieved significant revenue growth against both prior periods. Revenue of $381 million increased 71% from Q3 2018 and 36% from the previous quarter. The most significant factor driving revenue growth was the large increase in sales in Q3. Total gold sales were 256,000 ounces, up 39% and 21% from Q3 2018 and last quarter, respectively. We also benefited from a higher average realized gold price in Q3. The average price was $1,482 per ounce. This was up $278 per ounce from last year's third quarter and $162 per ounce from Q2 2019.

You can see on Slide 10 the contributions to revenue growth of volumes and price are the changes from last year's third quarter and Q2 this year. Both had a significant factor in driving revenue higher.

Turning to EBITDA. Q3 2019 EBITDA totaled $296.4 million, more than double the level in Q3 2018 and 60% higher than last quarter. The key driver of growth in EBITDA was the increase in net earnings. Depletion and depreciation costs were higher, reflecting increased production volumes.

Turning to the year-to-date review. Our net earnings were $390 million or $1.86 per share. That was 134% higher than $167 million or $0.84 a share for the first 9 months of last year. Revenue growth of 52% was the key driver of the increase in year-to-date profitability year-over-year. Again, that was a function of both higher sales and gold prices. We also benefited from improved unit costs and lower expensed exploration costs, with small contributions also from net finance income and other income. These factors will be partially offset by higher depletion and accretion cost -- depreciation costs and increased corporate G&A, reflecting our continued growth.

The next slide looks at growth in our cash. During Q3 2019, we increased our cash position by $146 million during the quarter. There are a few things on this slide that I want to point out. Our operating margin really drove the growth in cash. A combination of record sales, higher gold prices and improved unit costs were key factors in contributing to the higher margins.

As you could see on Slide 13, the various uses of cash we had. Not surprisingly, the most significant is our capital expenditures. What the slide really highlights is the fact that we're funding all of our growth and still rapidly building our cash position.

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

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Ian Holland, Kirkland Lake Gold Ltd. - VP of Australian Operations [5]

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Thanks, David. Starting with Slide 14. I just wanted to provide some comments on the quarter for Fosterville. The operation had a strong headline result with production of just over 158,000 ounces. It was a new quarterly record. This was built on exceptional grade performance for the quarter of 41.8 grams per tonne with tonnes milled and recovery essentially aligned as planned. The grade performance was driven by Swan production during the quarter. The image on the right-hand side of the slide shows a long section highlighting the stopes that's mined. There were 11 stopes in total mined for the quarter on the Swan ore body over 9 different levels. Combined with development, the contribution from Swan was approximately 59% of the tonnes containing 94% of the ounces produced over Q2.

The strong production result translated to exceptional unit cost performance, operating cash costs of $115 per ounce and all-in sustaining costs of $289 per ounce. And earnings from operations for the quarter came in at $199.5 million.

Investment continues at Fosterville with sustaining capital of $23.8 million and growth capital of $11.3 million for the quarter. The growth capital was focused on the 3 main projects: ventilation upgrade, paste plant and mine water treatment plant. The paste plant and mine water treatment plant on track to be completed this year with the ventilation upgrade to be completed in Q1 next year.

Turning to Slide 15 and the projection for the remainder of the year. We expect to be in line with current guidance of 570,000 to 610,000 ounces of gold produced and operating cash costs of $130 to $150 per ounce. We expect tonnage milled in Q4 to be similar to the previous quarter, with a further increase in production driven by higher grade as we continue to advance the stoping sequence of Swan into the higher grade areas of the resource.

Moving to the Northern Territory on Slide 16. We continue our work across a range of projects in the Northern Territory. The most advanced of these is the Lantern Deposit immediately adjacent to the Cosmo mine, where we continue to drill and develop to assess the mineralization.

The image to the right-hand side of the slide shows the development and trial mining in Lantern and Cosmo that occurred during Q3. We have also commenced trial processing early in October and expect to produce over 10,000 ounces of gold for the quarter, which will be credited against the capital expenditure.

It's important to note, though, that our vision for the Northern Territory is a larger multi-mine operation feeding a central mill. And to that end, we've continued work in a range of other areas during the quarter, which Troy Fuller will describe a little later.

With that, I'll pass over to Natasha Vaz to discuss the Canadian operations.

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Natasha Nella Dominica Vaz, Kirkland Lake Gold Ltd. - VP of Technical Services [6]

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Okay. Thanks, Ian. Good morning, everyone. As Tony mentioned, we have had a strong quarter in Q3. Production from the mine was 63,000 ounces, which was 13% higher than in Q3 2018 and 28% higher from the previous quarter. Year-to-date, we produced 185,000 ounces, so we are well positioned to achieve the guidance of 240,000 to 250,000 ounces this year from Macassa.

Tonnes processed in Q3 increased 18% quarter-over-quarter, averaging about 930 tonnes per day. So you may recall that in Q2, our tonnes were impacted by excess water in the mine related to the spring run-off. This is what limited our processing capacity in the second quarter.

As to the average grade in Q3, this improved to 23.3 grams per tonne. Here, we see continued success with solid performance in our stopes around the 5700 level on the South Mine Complex.

And now looking at costs. We continue to be well positioned relative to our guidance. Operating cash costs from Macassa were $425 per ounce for the quarter and averaged $397 for the year versus a guidance of $400 to $425 per ounce for the year. As for all-in sustaining costs, they improved in Q3 to $689 from $788 in Q2. Their improvement reflected both lower cash cost per ounce as well as a reduction in sustaining capital expenditures.

The capital expenditures were about $3 million lower in Q3, and this is a function of timing for capital development and mobile equipment, respectively.

Okay. So with that, I'll turn the call over to Eric Kallio, our Senior Vice President of Exploration.

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Eric A. Kallio, Kirkland Lake Gold Ltd. - SVP of Exploration [7]

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Thanks, Natasha, and good morning, everyone. For today's presentation, I'll start with Slide 18 and -- with exploration in Canada and then pass over to Troy Fuller for some comments on Australia.

In describing the program for Canada, I believe it's fair to say that the work has been strongly focused on Macassa and working on building up resources to support the new #4 shaft on its completion.

The slide at hand is an overview showing one of the main work areas on the 5300 level at the mine, along with locations of recent drillings. As indicated, there were approximately 200 new holes drilled during the quarter and with most of these being designed to test the east, west and depth extensions of the SMC complex and the Amalgamated Break. Although work is still in progress, we did release some initial results earlier in the quarter, and by all accounts, we consider these very positive.

Turning to my next slide, which is #19. We now see some more details on drilling, which was done to the west side of the level, and testing both the westward extension of the SMC and the Amalgamated Break. Shown on this slide is long section view of the area looking across the 2 zones to the north and displaying new intercepts for each zone with color coding.

Key results from the SMC are color coded in blue, and as indicated, includes some very significant assays in almost every drill hole, which -- and with some of the most important holes being located up to about 275 meters west than the current resource.

Key results for the Amalgamated are color coded in pink and again, includes multiple high grade intercepts, which both confirms and slightly extend the previously mined zone to the west. In addition to the above, we're also noticing some other very important observations about the Amalgamated. And -- with one of these being that a lot of the intercepts that seem to be occurring with deeply different structures which trend parallel to the Amalgamated Break rather than shallower and more parallel to the SMC. Many of the values are also located within a broad zone of alteration, which contains porphyries and increased sulfides. Also important is that much of this structure remains untested outside recent results, so leaving a lot of upside for the future.

So now turning on to the next slide, which is #20. We see some additional details for the east side of the level. And as indicated, the drilling here also indicates the very good results with the several cases, showing multiple zones and high-grade assays. A key part of this, from my perspective, is that some of the best assays again are located up to 250 meters east of the current resource, so in areas with very little drilling and demonstrating that the zone is still open to the east for further expansion.

Considering above, we believe we are extremely encouraged by the results and continued -- and especially the future potential to continue expanding these deposits. And now we are working on additional opportunities to accelerate and optimize this process. As part of this, we've already increased the number of drills on the level by 2. So we now have 6, and looking at new opportunities to even expand the amount of development as we go forward to create new platforms.

So all in all, things are looking good and the -- feeling very confident about the future.

So with that, I'll now pass on to Troy Fuller, our Director of Exploration for Australia.

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Troy Fuller, Kirkland Lake Gold Ltd. - Director of Exploration in Australia [8]

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Yes. Thanks, Eric, and good morning. Growth drilling in Australia over the quarter has been focused on drilling at Fosterville and in the Northern Territory.

At Fosterville, up to 8 underground rigs and 6 surface drill rigs have been operational in growth projects over the quarter. Drilling has continued, extensional drilling on the Lower Phoenix gold system, covering the down-plunge projections of the Lower Phoenix mineral resources. Drill results indicate significant quantities of sulfide mineralization resisting to depth, and we expect to see significant expansion of Inferred Mineral Resources in design for end-of-year model updates.

Continuity of mineralization has now been established over approximately 900 meters down plunge from the Swan mineral reserve block. And infill drilling is underway immediately down plunge of the Swan mineral reserves after the establishment of a hanging wall drill platform in the quarter.

In the Lower Phoenix system, we have also continued to undertake drilling into the open up-plunge extensions of the Cygnet structure, which lies south parallel and approximately 110 meters footwall to the Swan. Drilling into this structure has returned some encouraging results to date, including multiple occurrences of visible gold and sulfide mineralization. We fully expect to see expansion of mineral resources on this structure with our end-of-the-year model updates based on the drilling we've undertaken today.

Harrier drilling continued to focus on the down-plunge extensions of the Harrier mineral reserve block and has now defined continuity of mineralization approximately 500 meters down plunge of the Harrier mineral reserves.

Extensional drilling from the 200-meter exploration drift established to target anticline offsets at depth also commenced during the month. At the end of the quarter, 2 holes have passed through the projected position of the Harrier structured depth, which showed localized quartz veining and sulfide mineralization.

Further up plunge, drilling the sections on the eastern end of the anticline that displayed quartz veining with some visible gold and sulfide mineralization. There's a lot more drilling required in the zone to obtain a full assessment of the anticline target, and drilling will continue on this for the remainder of the year.

Surface drilling with 6 rigs at Robbin's Hill target continued to return encouraging results with drill holes returning sulfide and visible gold-bearing mineralized intercepts. Okay. Here, it's on the mineralization, that's been defined. The plunge is in a southernly direction to a depth of approximately 600 meters below surface. In addition, exploratory step-out drilling between Fosterville and Robbin's Hill has commenced to better understand the geological framework and mineral resource growth potential in this zone.

Initial results indicate that sulfide mineralization exists at a distance of approximately 1.9 kilometers south along the strike of the existing Robbin's Hill mineral resources.

In the Northern Territory, 3 underground and 2 surface rigs have been in operation at 3 main target areas. Underground drilling has been focused on the infill and extension drilling at Lantern, which has returned encouraging results, including several appearances of visible gold. The drilling for the remainder of the year is focused on infill to increase resource confidence ahead of mining, but the system remains open at depth and extensional drilling campaigns will continue into 2020.

Surface drilling at Union Reefs and Pine Creek continue to return positive results and demonstrate the growth potential with the mineralized systems over a long strike in that depth. We are confident that with further drilling, we will be able to establish significant mineral resources in close proximity to the Union Reefs mill. Drilling will continue on these targets for the remainder of the year. In addition, permitting for the prospect decline at Union Reefs is underway as we work towards commencing this development in mid-2020.

I'll now hand over to Tony to round out the presentation.

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

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Okay. Thanks, Troy, and thanks, everyone. Now turning to Slide 23, where we can just sum up what we see for the quarter and what you're seeing from Kirkland Lake Gold. We had record results in Q3 2019 and we ended the first month -- first 9 months of 2019 also well positioned to achieve our key production and unit cost guidance.

Our earnings so far in 2019 are very strong and currently position us as the industry leader. We're generating substantial amounts of cash flow and are building our financial strength. We use that financial strength to invest in our assets and also to return value to shareholders.

We are increasing our dividend for the fifth time to $0.06 per share starting in Q4 of this year. Our stock continues to perform well, being up close to 70% so far in 2019. And we are looking to -- forward to a very strong finish to the year with another solid quarter expected in Q4.

We expect to continue to have catalyst also to -- other catalysts to drive shareholder value, including experts -- some exploration results and updated guidance for 2020 over the next while.

So thanks again for participating in today's call, and we'll be happy to take any questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Cosmos Chiu from CIBC.

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Cosmos Chiu, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research & Equity Research Analyst [2]

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Maybe first off on Fosterville here. Ian, as you mentioned, Q4 grades will likely be once again better quarter-over-quarter. I don't know how much you can tell us at this point in time, but are these higher grades that we've seen in Q3 and Q4 sustainable into 2020?

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Ian Holland, Kirkland Lake Gold Ltd. - VP of Australian Operations [3]

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Yes. Thanks, Cosmos. I guess from our perspective, we've been really happy with the performance of the resource model for Swan. It's behaved in line with expectations or maybe, on average, a little better. We do expect to see a little higher grade in Q4 as we've foreshadowed. At this stage, for 2020, I wouldn't want to be giving any sort of firm numbers, but I think it's safe to say that we're seeing results that would look like -- similar to what we've previously put out in our guidance. We're not seeing, at this stage, any significant deviation from that.

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Cosmos Chiu, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research & Equity Research Analyst [4]

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For sure. And then, I guess again, at Fosterville or around Fosterville here. I noticed in the MD&A that some exploration tenements expired earlier on in 2019 and are now up for public bidding, EL, I believe, 3539. I guess my question is twofold. Number one, was there anything that you could have done in terms of spending and whatnot that could have allowed you to keep those tenements? And number two, since you were the previous operators of those tenements, do you have an inside track to renewing and getting those tenements back?

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Ian Holland, Kirkland Lake Gold Ltd. - VP of Australian Operations [5]

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Yes. Thanks. Thanks, Cosmos. In terms of retaining the tenements, no, there was nothing that we could have done in terms of expenditure. This was in line with the systems and processes that govern the regime in Victoria. What's happened in late October is there was a ground release announced by the Victorian government and includes 4 blocks between 350 to 500 square kilometers each. One of those blocks is essentially the ex EL3539. From our perspective, we're interested in the potential of all 4 of those blocks. We certainly believe we're well placed to participate in that. It will be a relatively lengthy process in terms of evaluation. But we believe we're reasonably well placed, and particularly so for the block that surrounds the mining lifts, given it's contiguous in nature. And we would see that as one of the factors that will govern the selection process.

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Cosmos Chiu, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research & Equity Research Analyst [6]

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Yes. I guess I asked those questions because I noticed in your technical report, I guess there's other tenements that could -- right now could expire in year 2022. So I guess when that happens, much like the EL4937 Yankee Creek, for example. So I guess come 2022, you have to go through the same process potentially as you're currently undergoing for EL3539?

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Ian Holland, Kirkland Lake Gold Ltd. - VP of Australian Operations [7]

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So correct, Cosmos. I guess the other point I'd really like to stress though is the mine lease expansion that occurred was approved earlier this year, where the mine leases went from 17 square kilometers to 28 square kilometers. That really, for us, the Q is -- the life of mine as we see it currently. And for -- without bringing any exact number on it, so that's 20 years into the future. These adjacent explorational licenses are important to us because we clearly see the potential, but they're not critical to that life of mine plan.

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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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For sure. And I'm happy you brought that up as well, Ian, because I know that the deposit plan, just to the south, and if I were to do an extension in terms of where the mining tenement is going into those exploration tenements, by then, it could be fairly deep, right? So I guess taking a step back, as you mentioned, what is the true sort of exploration potential in some of this exploration ground?

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Ian Holland, Kirkland Lake Gold Ltd. - VP of Australian Operations [9]

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So the exploration potential is high. But coming back to the mining lease, we see multiple lines of mineralization, not just the line that plunges south, beyond what was the former mine lease boundary into the extension. We see more -- for example, we see more shallow mineralization at Robbin's Hill, which Troy has spoken about. Plus we see other lines as well. And what I will say is that we're looking at, again, an aggressive exploration program in 2020 that won't be just focused upon the extension of Phoenix and Harrier. We'll be looking at testing these other systems as well.

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Anthony Paul Makuch, Kirkland Lake Gold Ltd. - President, CEO & Director [10]

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And sorry, Cosmos, I think it's worth saying. This process of explorations in our ground, the license is going back and it's a normal process that throughout the country is happening to all mining companies in any given day throughout the year. It just happened to be exacerbated because it happened to us at Fosterville. And on the other side, having someone come out, come in and do some exploration and come up with a discovery there, that's not something that we look at on it being negatively if it would happen.

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Cosmos Chiu, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research & Equity Research Analyst [11]

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Yes. Of course. Maybe switching gears a little bit here in terms of Macassa. I noticed that you've taken over from the general contractor with the shaft sinking. Was that always the plan? And I guess the second part of my question is, you mentioned, Tony, that it's not going to impact on cost. It's not going to impact on schedule, which is great. But I thought if you're switching over to your own sort of shaft sinking, I would have thought if you cut out that contractor cost, there could be potential positive impact on cost.

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Anthony Paul Makuch, Kirkland Lake Gold Ltd. - President, CEO & Director [12]

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Well, so to answer your first question, no, it was never our intent at the beginning. We awarded a contract and then we had a contractor come in. It's just as we progress through the project, we just felt that would be probably in our best interest to take it over and do it ourselves. And for the most part, the crew that's doing the work was the same crew that would have been working there for the contractor. And people we have working for us prior to this. Gilbert Dion, for example, was really the shaft leader. He's done numerous shafts throughout Canada and North America, and he was the one who did some of the shafts for us. We'd make sure it's him at west though. We got a lot of capable people here. And in terms of how that affects the cost and the schedule going forward, there's a lot of moving parts. But again, we see no upsets. And we see some opportunities as we go forward.

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Cosmos Chiu, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research & Equity Research Analyst [13]

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And then, Tony, I guess to give us an update here. So the hoist is in place, the gallery's in place. Right now, you're doing full face sinking of the shaft.

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Anthony Paul Makuch, Kirkland Lake Gold Ltd. - President, CEO & Director [14]

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Yes, we're actually down below. We actually probably just hit 700 feet. So we're 1/10 of the way down to final completion and things are really starting to -- they're starting to get on to the cycle and things moving well, and they're just getting battened now ready for winter.

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Operator [15]

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Our next question comes from Mike Parkin from National Bank.

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Michael Parkin, National Bank Financial, Inc., Research Division - Mining Analyst [16]

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Just a couple of questions. I'll start with one, just following up on the exploration license at Fosterville. If you look at Slide 21 of the presentation, the purple area of the Robbin's Hill, is that mineralization not -- looks like it's going north. Does that get impacted by the border of the mining license and the exploration license?

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Ian Holland, Kirkland Lake Gold Ltd. - VP of Australian Operations [17]

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Yes. Thanks, Mike. Ian Holland here. It would have with the previous mine lease, but the mine lease extension that we got was also to the north in early -- granted early this year. So that includes that extension potentially to the north.

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Michael Parkin, National Bank Financial, Inc., Research Division - Mining Analyst [18]

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Okay. So you're good there. Good. Then just a couple of kind of housekeeping items. On the accounts payable, that's been ticking up since early 2018 quarter-over-quarter consistently. Where should we kind of expect that to go going forward? Is that going to kind of start to level off? Is there any potential reversal?

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David Soares, Kirkland Lake Gold Ltd. - CFO [19]

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Yes. Look, we -- thanks for the question. We had a year -- 2019 was a year where we had a lot of projects, both at Fosterville, at Macassa and so we have -- yes, that's the reason for the uptick. I suspect that as we move into next year, and a lot of the projects that we had at Fosterville, for example, are going to be completed by the end of this year or early Q1 next year. We should see that come back down to sort of the normal run rate for what you would expect.

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

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Yes. So getting onto that, year-over-year, we've increased our production from 2017 to 2019, right, from 600,000 ounces to close to 1 million. And we've increased our exploration expenditures from $40 million to now well over $120 million, $130 million and other costs and capital developments, sustained CapEx, et cetera, growth CapEx. So they all lead to an increase in accounts payable or working capital, right?

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Michael Parkin, National Bank Financial, Inc., Research Division - Mining Analyst [21]

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Yes. No, naturally, it would rise with that. And then with the Northern Territory spend, you've spent about $32 million on it. That was capitalized in Q3. Quite a bit of activity, it seems like, with the third quarter. Should that be kind of coming down in the fourth quarter now that the bulk sample seems to be done?

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Ian Holland, Kirkland Lake Gold Ltd. - VP of Australian Operations [22]

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Yes. Thanks, Mike. So I mean the activity that's occurring is -- I hope -- I mean lots of drilling, as Troy indicated before, but also really importantly, underground development. And so for us, we've been developing with 3 development drills and really testing the ore body and understanding that. So very much, we would consider a trial mining phase. We've commenced trial processing. So we would expect expenditure to remain pretty similar. But we will have the advantage of having some of that gold production credited back against capital because we're at commercial production in advance of a decision to go into commercial production. So from our end, we are working through our 2020 budgets as we speak. We're pretty optimistic with what we see. But we've both had no affirmed approval or commitment for commercial production as yet.

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Michael Parkin, National Bank Financial, Inc., Research Division - Mining Analyst [23]

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Great. And then in terms of the level of development, you've done about 7 kilometers, if I read it right. And is there kind of a target completion amount before you make a full go-ahead restart instruction decision, whatever you want to call it?

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Ian Holland, Kirkland Lake Gold Ltd. - VP of Australian Operations [24]

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We would expect to make a decision by the end of the year or thereabouts, really for commercial production. I mean we're pretty optimistic with what we see. Clearly, we've turned the mill on. We're hurrying up quietly, but we're pretty comfortable and clear in what we see. Despite of the stress, we haven't made a full commercial decision as yet.

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Michael Parkin, National Bank Financial, Inc., Research Division - Mining Analyst [25]

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Okay. And then with Fosterville, we've been getting good exploration updates to the Macassa. I haven't seen anything from Fosterville for a while. What's the thinking in terms of an update on that front?

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Troy Fuller, Kirkland Lake Gold Ltd. - Director of Exploration in Australia [26]

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Yes, Mike. We've been drilling in 3 main areas, in the Phoenix, Harrier and Robbin's Hill areas. And we expect mineral resource growth in all those areas. We're just waiting to get more complete sets of data before releasing results, but I anticipate that there will be news flow on our drilling projects before the end of the year.

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Operator [27]

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Our next question comes from Craig Stanley from Eight Capital.

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Craig Philip Stanley, Eight Capital, Research Division - Principal for Metals and Mining Research [28]

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Just a few quick ones for me. First off, is the 2.75% Victoria state royalty, is that going ahead? And if so, when? Is it in 2020?

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Ian Holland, Kirkland Lake Gold Ltd. - VP of Australian Operations [29]

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Yes. Thanks, Craig. Ian Holland. So as it stands now, it's -- the royalty is going ahead. There is work. So from -- both from an individual company stance plus our industry body, the Minerals Council, there have been lots of discussions with the government on various potential modifications to the royalty. Those discussions continue. There's some potential for some changes. But from our point of view, we see -- the likelihood is that it goes ahead on January 1 effectively at that sort of rate.

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Craig Philip Stanley, Eight Capital, Research Division - Principal for Metals and Mining Research [30]

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Okay. Swan was 59% of the tonnes. Is that pretty much -- are you guys getting the sort of the upper limit of how much you can mine out of there?

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Ian Holland, Kirkland Lake Gold Ltd. - VP of Australian Operations [31]

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Pretty much, yes. It's about 50% of the reserve. So that's about the right sort of number. Clearly, it's -- because of the grade, it's the highest priority area to be mining from, but that's pretty much the limit.

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Craig Philip Stanley, Eight Capital, Research Division - Principal for Metals and Mining Research [32]

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Okay. The Amalgamated Break mineralization that you guys have been hitting, the more that you look at it, is it looking more like the SMC? Or is it more like '04 type mineralization?

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Eric A. Kallio, Kirkland Lake Gold Ltd. - SVP of Exploration [33]

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It has probably a lot of similarities to some of the mineralization in SMC. Even the mineralization in SMC can vary depending on whether it's hosted in porphyry or in the volcanic tuffs. But generally, it's looking more like what you would see in the volcanic tuff. There's gold with carbonate-sericite alteration. And there's some porphyry intrusions nearby. So it's, I would say, probably very similar to some parts of the SMC.

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Craig Philip Stanley, Eight Capital, Research Division - Principal for Metals and Mining Research [34]

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And last question for me. The exploration license that surrounds Fosterville, that 3539, are you thinking of any indication of how much it might cost to renew? Are we talking hundreds of thousands of dollars, millions, tens of millions?

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Ian Holland, Kirkland Lake Gold Ltd. - VP of Australian Operations [35]

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Yes. It's not a function of our cost to renew. Essentially, there's a licensing regime where you would pay a certain amount for the license by area, but that's fixed. It's really around -- the competitive part of the process is really around what a company brings to the table in terms of their license to operate, so their social safety environmental performance, their technical ability, their financial capacity and their ability to develop resources from that area, so ultimately, returning value to the state. So that's -- it's really on those sort of areas that the assessment process is on.

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Operator [36]

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Our next question comes from John Tumazos from John Tumazos Very Independent Research.

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John Charles Tumazos, John Tumazos Very Independent Research, LLC - President and CEO [37]

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I'm pinching myself twice. I'm talking to a company with a 36% ROE. And I'm talking to a company that hasn't blown the money. As it relates to reserves that are currently about 6 million ounces or a 6-year life, as you increase output in the Northern Territories and with the Macassa shaft, there's a chance that production rises faster than the reserves or the reserve life falls a little bit, stays the same, doesn't go up a lot. Some investors don't understand the high grades and the underground line reserves that aren't proven out like a big porphyry. Would you slow down the production to sort of keep in line with reserves? Or would you buy in stock because people don't understand the outlook?

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Anthony Paul Makuch, Kirkland Lake Gold Ltd. - President, CEO & Director [38]

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Well, I think, John, good valid points. But I mean reality is we got to -- we mine as effectively as we can at our operations. And we explore aggressively because we see the opportunity to continue to grow value. But the lead ounces sit in the ground, that's not really in our DNA. We got our operating plants, and we're going to work them to -- so that they create value today for our shareholders. There's a lot of ways we create value. One is by costs and earnings and -- low cost and earnings and higher revenues that certainly -- but we also create value for shareholders with the non-drill bit by discovering new deposits and extending reserves and resources. And there'll be some highs and lows over time. But I mean fundamentally, I think we're working on how we maximize value all the time.

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John Charles Tumazos, John Tumazos Very Independent Research, LLC - President and CEO [39]

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So we might want to just be comfortable with a short reserve life if the miners get it out of the ground faster than you can document things on 43-101.

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Anthony Paul Makuch, Kirkland Lake Gold Ltd. - President, CEO & Director [40]

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It's underground gold mine. I remember years ago working up at [Royal Palm] back in '95, '96, where the chief geologist came to me and he's all upset at the end of the year, we produced 170,000 ounces and 0.5 million, we put them in the reserve statement. Since then, that mine produced over 3 million ounces of gold. So it's the nature of underground gold mining in a lot of these areas. We do [start] very low. We do recognize the importance of building up the resource and the reserves to really give some comfort to the shareholders, and that's why we are a very aggressive explorer in terms of our drilling. So we call that an asset.

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John Charles Tumazos, John Tumazos Very Independent Research, LLC - President and CEO [41]

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If I can ask another question. I'm a little confused that the business -- the discussion about claims expiring around Fosterville and other companies picking them up. You have an extremely complicated, sophisticated, brilliant milling process, combining many techniques for the quartz versus the refractory ore and bio leaching, and the zones you're drilling are kind of deep in places. Is there a big rush to stake claims all around you for people who don't have any idea how to mill the ore?

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Ian Holland, Kirkland Lake Gold Ltd. - VP of Australian Operations [42]

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So thanks, John. I mean clearly, there's a lot of level of interest in the area, given the high-grade nature of the discoveries and the production that's occurred, but I think point you make is a really valid one. There's only one place that, that material is going to be milled and that's at the Fosterville mill. So yes, from our end, we don't have anything to fear from others discovering anything in the area. It would only be to our benefit, I think.

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John Charles Tumazos, John Tumazos Very Independent Research, LLC - President and CEO [43]

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So these books are going to do high-risk wildcatting and if they hit something, the best they can do is throw it to you for a royalty.

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Ian Holland, Kirkland Lake Gold Ltd. - VP of Australian Operations [44]

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That could be an outcome.

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Operator [45]

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Our next question comes from Steven Butler from GMP Securities.

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Steven Howard Butler, GMP Securities L.P., Research Division - MD of Equity Research & Gold Analyst [46]

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David, a quick question for you. Obviously, you guys printed a heck of a lot of EBITDA, but you didn't print out or pay a lot of taxes. Maybe could you explain your tax situation in the quarter? You paid such a minimal level of cash tax. Will that catch up, too? Or is it a timing thing? Or can you explain that?

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David Soares, Kirkland Lake Gold Ltd. - CFO [47]

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Sure, sure. Thanks for the question. It is. And it is something to think about for the year, for 2019 and really it's really based on the fact that our installments for 2019 taxable income were very low. Because in 2018, our taxable income after utilizing the losses was very low. So our installments are sort of artificially low compared to what our actual tax obligation is for 2019. So we will start -- we filed our 2018 tax reserves in Australia recently, and so we will start making higher installments on what we owe beginning in November. So you could see somewhere in the neighborhood of $12 million to $16 million on a monthly basis, right up through the first half of next year with a large catch-up payment at the end of June once we file our tax returns next year.

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Steven Howard Butler, GMP Securities L.P., Research Division - MD of Equity Research & Gold Analyst [48]

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Okay. So is it effectively a -- is it a 12-month lag or effectively a 6-month lag? Is that sort of what you're saying?

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David Soares, Kirkland Lake Gold Ltd. - CFO [49]

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More or less a 12-month lag.

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Steven Howard Butler, GMP Securities L.P., Research Division - MD of Equity Research & Gold Analyst [50]

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More or less, a 12-month lag. Okay. Got that. And Troy, just coming back to you, the Slide 21, which you showed those very long section views of that development drift that's been driven above the Phoenix and Cygnet zone with those several drill base with indicative drill holes off them. Is this planned drilling or drilling that's been already undertaken? I would assume it's still planned drilling.

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Troy Fuller, Kirkland Lake Gold Ltd. - Director of Exploration in Australia [51]

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Yes, Steven. So that drill development is in, and we currently have 4 drill rigs positioning that development, targeting those down-plunge extensions of the Swan mineral reserves. So drilling is in progress, and the results from those drilling -- from that drilling will be incorporated in the end-of-year model updates.

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Operator [52]

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And our final question comes from Ovais Habib from Scotiabank.

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Ovais Habib, Scotiabank Global Banking and Markets, Research Division - Research Analyst, Mining [53]

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Just a couple of questions from me. Most of the stuff has been answered. On -- Ian, on Harrier, obviously, you guys have been developing into Harrier. When do you guys start expecting to see ore kind of coming out? Where I'm basically heading towards is how should we kind of look at 2020 in terms of ramp-up and throughput. Is some of that material coming in 2020?

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Ian Holland, Kirkland Lake Gold Ltd. - VP of Australian Operations [54]

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Thanks, Ovais. So in terms of -- without providing detailed numbers, we'd expect that contribution from Harrier to still be quite modest in 2020 and then increasing beyond that point. One of the key drivers for that is the completion of the key infrastructure projects, the ventilation upgrade, with associated power upgrade, et cetera. So the volume increase, which is the additional contribution from Harrier is a little bit beyond that, really. So I would expect that we'd see pretty similar volumes in 2020 to what we've seen this year.

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Ovais Habib, Scotiabank Global Banking and Markets, Research Division - Research Analyst, Mining [55]

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Okay. Got it. And just moving on to Cosmo as well. Obviously, you guys are looking to make some sort of decision by the end of the year on commercial production. But can you give us kind of just what should we expect over the next couple of months just in terms of updates from you guys? Is there any kind of -- once you do make a decision, is there a mine plan expected to be released? Or how should we look at this?

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Ian Holland, Kirkland Lake Gold Ltd. - VP of Australian Operations [56]

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Yes. What we would expect to do is the potential for some exploration drill results to be released. We'll see where that stands. But in terms of framing a guidance for 2020, then, clearly, from our end, we want to be talking about production levels and cost metrics. In terms of what we're looking for here, [via segments], it's clearly an operation of significant scale, or at least a pathway to that in that sort of plus 100,000 ounce per annum production profile, with cost metrics that make sense to us and an ability to generate cash flow. So they're the criteria that we're looking for, and we're working through our own internal processes around for that now.

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Operator [57]

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Thank you very much. That concludes the questions. I'll turn the call back over to Mark Utting for closing comments.

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Mark E. F. Utting, Kirkland Lake Gold Ltd. - VP of IR [58]

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Thanks very much again to everybody who took time today to participate in the call. As you heard, we had a record third quarter and very encouragingly expect to have a very strong finish to 2019. We're generating industry-leading earnings. We're building our financial strength. We're making very good progress with our projects and have a lot of exciting things going on from an exploration standpoint. We expect to continue to have a lot to say and look forward to updating the market again in the weeks and months ahead. So thanks again, enjoy the rest of your day.

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Operator [59]

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Thank you very much, ladies and gentlemen. This concludes the conference. You may now disconnect.