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Edited Transcript of KL earnings conference call or presentation 31-Jul-19 2:00pm GMT

Q2 2019 Kirkland Lake Gold Ltd Earnings Call

VANCOUVER Aug 6, 2019 (Thomson StreetEvents) -- Edited Transcript of Kirkland Lake Gold Ltd earnings conference call or presentation Wednesday, July 31, 2019 at 2:00:00pm 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

* Duncan King

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

* 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

* 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

* John Charles Tumazos

John Tumazos Very Independent Research, LLC - President and CEO

* Stephen David Walker

RBC Capital Markets, LLC, Research Division - Head of Global Mining Research and Analyst

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen. My name is Julie, and I will be your conference operator today. I would like to welcome everyone to the Kirkland Lake Gold Second Quarter 2019 Conference Call and Webcast. (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 morning, everyone. Welcome to our second quarter 2019 conference call and webcast. With me today are most of the members of the Kirkland Gold senior management team, including Tony Makuch, our President and Chief Executive Officer; David Soares, our Chief Financial Officer; Eric Kallio, our Senior Vice President of Exploration -- Global Exploration; Ian Holland, our Vice President of Australian Operations; Duncan King, our Vice President, Mining Kirkland Lake; Natasha Vaz, our Vice President Technical Services; and we also have Troy Fuller, who is our Director of Exploration in Australia, with us today. There are also several other members of the management team in the room as well. As indicated today, we'll be making remarks on the results for our second quarter and first half of 2019. After the remarks, we'll then open the call to questions. The slide deck that we'll be referring to is available on our website on -- both on the homepage and in the Events section.

Before I get started, I'd like to direct everyone to the forward-looking statements on Slide 2 of the slide deck. Our remarks and answers to questions may contain and likely will contain forward-looking information about future events of our company. Please refer to Slide 2 as well as the forward-looking information section in our MD&A dated July 30 for the 3 and 6 months ended June 30, 2019. Also during today's call, we'll be making reference to non-IFRS performance measures. A reconciliation of these measures is available in the Q2 press release and MD&A. Finally, I'll emphasize that all figures -- numbers given today will be in U.S. dollars, unless otherwise stated.

And with that, I'll now turn the call over to 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. We came out of a -- we really had a solid quarter in Q2. This year, maybe it wasn't quite as good as Q1, which was really a good quarter, but it was still a very strong quarter. And we expect the next 2 quarters this year to continue to be significant improvements and really strong quarters, especially when you get a sense of where our guidance are. But before I get into things too much, again, I wanted to thank the people at Kirkland Lake Gold. They are the ones that really did all the work. We just get to sit here and talk to you about the accomplishments. And so maybe we -- it's what everybody does, and especially working safely, that really makes this -- makes a company move ahead and make it profitable for our shareholders.

Again, now just getting into Q2, we had production of 215,000 ounces. Cash costs were 312,000 ounces (sic) [$312], all-in sustaining cost, 638 ounces (sic) [$638] for the quarter. Again, we feel these -- again, you get a sense these are industry-leading. And one very strong earnings per share of $0.50 per share for the quarter. And we have demonstrated our company can generate a lot of cash flow and we did it again in Q2. Operating cash flow of -- was $178 million or $0.88 per share before changes in working capital. And very importantly, we added $53 million of cash on the balance sheet, while internally funding our growth.

Turning to Slide 4. Looking at year-to-date, it was a record half year with production of 446,000 ounces, cash costs, just above $300 per ounce $200 per ounce and all-in sustaining cost of just under $600 per ounce. Earnings per share for the first half of the year $1.4 for the adjusted earnings per share, we had free cash flow of $146 million, and we increased our cash by 41% in the first half of 2019. The cash now sitting at about $470 million by June 30.

Slide 5, this gives a sense of what production growth has been quarter-over-quarter, and where we see -- where you see improvements.

Slide 6, this gives you a sense of our guidance at the halfway point, get a sense we're on track for our key operating parameters -- for our KPIs for 2019. We are ahead of plan at Fosterville and with higher production coming, expect to be in the top end of our 570,000 to 610,000 ounce target, and we are tracking very well against our cash cost guidance here. Macassa is very well positioned to achieve its production guidance, and it currently sits better than guidance on cash costs. We fully expect to achieve our consolidated guidance of 950,000 to 1 million ounces this year at cash cost of $300 per ounce and all-in sustaining cost between $520 and $560 per ounce, so you get a sense based on where we see as going with our guidance at our second half of the year. And our next 2 quarters are going to be extremely strong quarters.

Looking at some of our other guidance, we are tracking ahead of guidance with our capital, we have gone into our -- they're doing a lot of advancements at a number of foreshafts, but we may -- we are ready to get thinking something, and I'll give you a little bit more color about that later.

And we see some of these numbers -- expect to see some numbers come down, and we will end the year at close to our current target ranges for -- in all areas. We gain -- from a capital point of view, we'll review our guidance again in Q3.

And with that, I'll introduce David Soares, our CFO.

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

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Thank you, Tony, and good morning, everyone. Looking at Q2 2019 net earnings totaled $104 million or $0.50 a share. Earnings increased 69% from Q2 2018 and were slightly lower than the record level we achieved in Q1 this year. Adjusted earnings this quarter were similar to net earnings at $105 million, also $0.50 per share. The key drivers of earnings growth compared to last year were strong revenue growth and improved unit cost. We also had lower expense exploration cost year-over-year. These factors more than offset slightly higher G&A costs and other loss of $5.4 million pretax, largely related to foreign exchange, which compared to other income of $4.3 million in Q2 2018. We're now capitalizing more of our exploration costs, and I will discuss that in a few minutes in more detail.

Moving on to the next slide. Looking at revenue for Q2 2019 in more detail. We had total revenue of $281 million for the quarter, a 31% improvement from the $215 million in Q2 2018, mainly driven to higher gold sales. The gold sales totaled 212,000 ounces, 29% higher than the 164,000 ounces for the same period last year. The increase in sales had a $62 million favorable impact on revenue year-over-year. There was also a small favorable impact from slightly higher gold price. But for the most part, the gold price was similar for all 3 periods covered on this slide.

Moving on to looking at EBITDA. For Q2 2019, EBITDA totaled $185.8 million, a 50% increase from Q2 2018. The key driver of growth in EBITDA was the increase in net earnings. Depletion and depreciation were largely unchanged as the impact of higher production volumes was offset by lower depletion and depreciation costs on a per ounce basis. That reflects an increase in our base of depletable assets with our last reserve update. Our effective tax rate for the quarter was 31.6%, unchanged really from Q2 2018. We did see an increase in the current income tax expense, given that we had tax loss carryforwards that were utilized in last year's second quarter that we do not have in this quarter in 2019.

Moving on to the next slide, and turning to the year-to-date numbers. Our net earnings of $214 million or $1.02 per share increased 92% from $111 million -- $111.5 million or $0.53 per share in the first half of last year. Revenue growth of 42% was the key driver of the increase in year-to-date profitability year-over-year. We also benefited from an improved unit cost and lower expense exploration. These factors were only partially offset by higher depletion and depreciation costs, slight increases in corporate G&A reflecting our continued growth and supporting the same. And we did have another loss in Q2 2019, mainly related to foreign exchange.

Moving on to the last slide of the cash position. So this slide looks at our growth in cash during Q2 2019. We increased our cash position by $53 million since the end of Q1 to the end of the culls of Q2. Are -- at the same time, we did -- we increased our cash position, we invested in our capital expenditures and we also bought back stock. There are 2 items here that I -- in this waterfall that I'd just like to draw your attention to. One is the fairly low level of expensed evaluation and exploration. In Q2 of this year, we took a look at our exploration programs and our policies around accounting and exploration that determine that. And given the significant amount of drilling that we are doing in close proximity to our existing mining areas, the drilling that's being done for the purposes of extending these mining areas, we decided to capitalize more of these exploration costs. This is a trend that is likely to continue.

The other area I'd like to draw your attention to is cash taxes paid. So our cash tax payments this year are fairly low, and they're based on installments that are being made for 2019 based on 2018 taxable income levels. We expect that these installments for 2,000 that are being -- the cash tax installments being made in 2018 to remain relatively low. And with catch-up cash taxes paid for 2019 tax returns to be made in the second half of -- second quarter rather of next year.

With that, I'd like to 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 12. I just wanted to provide some comments on the quarter for Fosterville. The operation had a strong headline result with production of around 141,000 ounces, which was a new quarterly record for the operation. This is built on really on exceptional grade performance for the quarter of nearly 40 grams per tonne, with tonnes needed recovery essentially aligned with plan. The great performance was driven by Swan production during the quarter. The image on the right-hand side of the slide shows a long section highlights the sources mined. There were 11 stopes in total mine for the quarter on this one orebody over 7 different levels. Combined with development, the contribution from Swan was approximately 50% of the tonnes containing 90% of the ounces produced over the quarter. The strong production result translated through to exceptional unit cost performance. So operating cash cost of $120 per ounce, all-in sustaining cost of $318 per ounce and earnings from operations for the quarter, which came in at around $140 million.

Investment continues, strong levels of investment continue at Fosterville with sustaining capital of $22.9 million and growth capital of $14.1 million for the quarter. The growth capital is focused on the 3 main projects, ventilation upgrade, paste plant and mine water treatment plant, all of which remain on track for completion this year.

Turning to Slide 13 and the projection for the remainder of the year, we expect to be in line with the current guidance of 570,000 to 610,000 ounces of gold produced and operating cash costs of $130 to $150 an ounce. We expect Hunch Mill in H2 to be pretty similar to H1, with the increase in production driven by higher grade as we continue to advance the studying sequence is Swan into the high grade areas of the resources.

With that, I'll pass over to Duncan King.

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Duncan King, Kirkland Lake Gold Ltd. - VP of Mining for Kirkland Lake [6]

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Good morning. So as Tony mentioned earlier, Macassa had some challenges in Q2, following its record performance in Q1. The most significant impact was from the water related to the spring runoff, getting into the mine and plugging our lower loading pocket. We expect -- we expected it to be resolved by June; it ended up going right through the quarter. We will have our 5,700 level loading pocket back in use very soon. And I can tell you that we had a strong July with an average period over 25 grams good.

Looking at the numbers for Q2, we produced 49,000 ounces at cash cost of $466 and all-in sustaining cost of $788. On a year-to-date basis, we are right in line with expectations, largely driven by the strong grade performance in Q1. We are on track to produce 240,000 to 250,000 ounces at cash costs around $400 per ounce. In terms of the #4 shaft project, work is advancing, and we will begin sinking within the next couple of weeks. That will be a significant milestone for the project. The surface construction is largely complete, and the key infrastructure is in place, and we are in the process of transitioning to the sinking phase of the project. Capital year-to-date for the shaft is about $42 million.

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 [7]

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Okay. Thanks, Duncan. Good morning, everyone. Today, I'll start with Slide 15 and an update on recent work in Macassa, where I believe we continue to make very strong progress on our exploration program. As indicated on the slide, most of our new work was focused on areas surrounding the SMC complex near the 5,300 level and included substantial new drilling and development following up on new extensions for the SMC and new discoveries on Amalgamated in Q1. In terms of drilling, we completed over 21,000 meters in Q2, bringing our total year-to-date to about $38,000. And in terms of development, we completed almost 200 meters, with most of the new development used to advance key exploration drifts on 5,300 level to the East and West. In addition to the above, I'd like to mention the significant amount of work done on new drill platforms with 5 new platforms installed, during the quarter, which I believe will allow faster and better angles for drilling, especially for the Amalgamated Break, 3 of the platforms on the 5,300 level and allow testing the SMC up to 200 meters east and 500 meters west. The other 2 on 5,600 and 5,700 level are specifically designed to test for extensions of the Amalgamated.

In terms of results, we continue to be very encouraged by what we see with many new holes reinforcing the previous results, suggesting further opportunities for expansion. Given the above and considering new work in progress, we believe we are on very good track to replacing resources and reserves by year-end.

Turning to my next slide, #16. I'd just like to briefly discuss some of our plans going forward. Shown here is the long section looking north over the SMC complex with the key exploration targets highlighted in red. As expected, the key focus for us going ahead will remain on the East, West and depth extent of the SMC. And if we look to the East and West, we see the structure being opened for at least for another 500 to 1,000 meters. The results now initiated long-term drifts in both of these directions to test both the SMC Amalgamated Breaks in their most efficient fashion. One of the interesting things about the area to the West is already identified it some older drilling just South of the 3 Shaft, which appeared to line up with and have similar character to the West part of the SMC. If we're right about this, it could potentially extend the structure by up to about 2,000 feet.

In terms of other targets we're looking at, and we are now looking at also being a lot more focused on Amalgamated Break, and especially the Central West portions of this, which has a very little testing in the past. As mentioned, we are very encouraged by what we've seen in recent drill holes and now set up these 3 new areas where we can do further testing for this. So hope soon we will be able announce a lot more results from this soon. Other areas very optimistic about are shown with circles in the upper part of the mine near the #2 shaft and near surface, east of the #3 shaft. The zone near the #2 shaft seems to show a strong potential for new flat zones similar to the SMC near the 3,000 level and the zone #3 shaft potential for other mineralization near the Amalgamated Break. Both of these areas are ones that have very low drilling in the past. But we're now looking at ways to accelerate some more drilling on these and with one of the possibilities being from surface.

In terms of the zone #2 shaft, we're also looking at plans for a new development ramp for 34 levels to gain access so we can do detailed sampling and drilling. In summary, we are very pleased with progress on current exploration work to date and looking forward to continuing to test all of these new targets.

And with that, I'll pass the call over to Troy Fuller, our Director of Exploration for Australia, and he'll give an update on recent work at Fosterville.

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

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Thanks, Eric, and good morning. Great feeling at Fosterville over the quarter, has been focused on the Lower Phoenix, Phoenix, Harrier and Robbin's Hill targets. 5 underground REITS have been dedicated to growth programs, targeting extensions of the Harrier and Phoenix and Lower Phoenix systems and 4 REITs ramping up to 6 rigs over the quarter have been focused on the infill and expansion of Robbin's Hill resources. In the northern part of (inaudible), approximately 4 kilometers northeast off the Fosterville resources.

Harrier drilling in Q2 focused on the downtime the extensions of the Harrier Mineral Reserve blocks and results returned to date indicate significant extensions of sulfide mineralization. Whilst drilling will continue to define extensions of mineralization associated with the seam anticline offset position in H2, drilling will also target the prospective anticline offset zone at depth, which now could be drilled following the recent completion of a 200-meter exploration gift extension, which can be seen on Slide 17.

This is an exciting exploration target as we have observed increasing grades of software mineralization at depth, including of course the visual gold as we approach the anticlime target and the new platform development provides a drill position to effectively target the anticline offset target at depth, with drilling to commence shortly.

In addition, we have continued extensional drilling into the large cleaning style system at depth during the quarter, recovering the downtime projections of the Lower Phoenix mineral resources. Drill results to date indicate the significant quantities of sulfide minerals -- mineralization to cease to debt, and we expect to see significant expansion of inferred mineral resources in the zone for any year model updates. Preliminary modeling indicates we have established continuity of mineralization, approximately 900 meters south of current raw Phoenix mineral reserves. Further today's results, we have undertaken step-out drilling into the open up plant extensions of the Cygnet structure, which was subparallel at approximately 110 meters per well 2 at the Swan. The drilling has yielded some very encouraging results, including multiple appearances of visible gold mineralization and sulfide mineralization. H2 drilling will be focused on infill drilling new zones with a view to increase confidence and expand mineral resources on the Cygnet structure for end of the year updates.

Robbin's Hill programs continue to return encouraging results with a coherent sign of sulfide mineralization now defined to a depth of approximately 600 meters below surface. Several appearances of this will also occur within the sulfide high level mineralization at depth, driving an increasing grade profile, and the system remains open for further expansion. Drilling for the remainder of the year will focus on continued extensional drilling of provincial mineral resources at depth, coupled with step-out programs to increase geological understanding any discount resource growth potential between Robbin's Hill resources and Fosterville line resources, which include the Phoenix and Harrier resources approximately 4 kilometers to the Southwest.

I will now hand over to Ian Holland to talk through growth developments in the northern territory.

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

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Thanks, Troy. So just looking at Slide 18. We continue our exploration initiatives across our range of projects in the Northern Territory. The motive after these is the land and deposit immediately adjacent to the customer line, whether 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 that we are planning for H2. With this advanced exploration also planned to include an element of trial processing to aid our assessment work, it's important to note that our vision for Northern Territory is a larger multi-mine operation, feeding a central mill. And to that end, we've continued work on a range of other areas as well during the quarter, including permitting work at Union Reefs North for the prospect decline, drilling programs at Union Reefs South in the middle line and drilling in the Pine Creek area where we continue to be encouraged by the results that we see.

With that, I'll pass it back to Tony.

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

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Thanks, everyone. Thanks, Ian, for finishing up there. And then I'll go to Slide 19 here on give you a sense of -- we see ourselves continue to have superior performance, and we have strong value creation for our shareholders throughout the year. And we see, as the year progresses, continued value creation. We are definitely on track to achieve our 2019 guidance of 950 to 1,000 -- 1 million ounces, operating cash costs of $285 to $305 per ounce and all-in sustaining cost of $525 to $560 per ounce. We have industry-leading earnings and earnings per share. We continue to build our cash position while we internally fund our growth. We've increased our dividends, and we've been buying back our shares, so focus on shareholder return in a number of other areas. And that's resulted in a share price increase of over 70% year-to-date.

And as you know we -- as Ian and Troy and Eric gave you some color on the exploration side, we continue to be aggressively exploring. We have identified a number of new targets. We have new mineralization, some new exciting deposits happening, both maybe in Northern Territory and definitely developments at Fosterville and really at Macassa with a new mineralization system at Amalgamated Break. So we see some exciting new developments coming up in the company as we go into the second half of the year, combined with solid operating performance.

So with that, I'll end the call and be happy to take some questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from Stephen Walker from RBC.

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Stephen David Walker, RBC Capital Markets, LLC, Research Division - Head of Global Mining Research and Analyst [2]

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Tony, just sort of a higher-level question, first of all, at Fosterville and then follow up with some more detailed questions. When you look at the throughput, obviously, given the higher grades and the visible gold, the throughput at Fosterville through the plant hasn't been between 1,200 and 1,300 tonnes a day. That plant has produced between 2,200 and 2,400 tonnes a day. And clearly, there's that potential to increase throughput once you've completed the infrastructure between Harrier and the Phoenix deposits. Can you talk a little bit about when you expect to see the ventilation and the mining infrastructure, water and power completed to allow you to at least get access to greater tons from a mining perspective? And then as a follow-up, when could we see the plant optimized to allow greater throughput? So just from an infrastructure perspective, you give us a sense on sort of how you see that unfolding here over the next couple of years?

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

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Yes, good question, Stephen. I can make that you can give a little bit more color on the things. But as we mentioned, we have a number of capital projects happening this year with the ventilation project, which we expect to get done sometime in Q4. We've had a little bit issue where the rods -- the contractor had his rod stuck in the hole trying to tie a hole to the surface part, trying to get through that. But we still are on track to get the ventilation done before the end of the year. We have our paste-fill plant that we are actually planning to begin commissioning now in August and see September, and we expect to be starting natural port base underground in Q4 in October, November this year, which will definitely help in terms of mining as we go deeper.

And then we have a few other projects that are ongoing with development. For the most part, in terms of the mill, we -- yes, we do have the 2,400 tonnes a day or the larger capacity on tonnes per day in the plant. But at these kind of grades, we have some projects in the mill to adjust that, we're looking at potentially -- we're looking at now adding a second gravity circuit to the plant. We're getting 75% to 80% gravity recovery on gold and at 600,000 ounces a year, you get a sense it gets overwhelming on the circuit. We want to -- we don't want to be losing gold. We want to be efficient there. So that's one project. We are looking at automated sampling systems throughout the plant, to get a better handle on where gold is moving into before we really push our tonnage up and we have to build a new refinery. So we have a number of these projects, which are all sort of coming in Q4 this year, which will help us. And then tied to that in terms of getting throughput up at Fosterville is the exploration program ongoing with building exploration funds both at Harrier or some other locations within Lower Phoenix. Ian, if you have anything else to add to that?

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Ian Holland, Kirkland Lake Gold Ltd. - VP of Australian Operations [4]

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I mean (inaudible) saying I mean -- I agree, just rounding, we would see as per our 3-year guidance, we see pretty similar production levels in 2020 and 2021 as to this year. Perhaps at the back end of that, there's some volume increases, but it's fairly stable. It really is a longer-term play for us here in terms of the drilling and development and the infrastructure that allows us to really optimize the operation and looking at long-term material movement and that sort of thing. So it's actually a work in progress, but we expect in the short- to medium-term to see pretty similar levels to what you're seeing now.

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

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Yes. And Stephen. When we look to the exercise of adding some lower grade material into the plant, first off, some of it would take away from us being able to mine in some of the areas we are currently, because we -- as we said, we have limited ventilation. And we are running 5 without development crews and doing aggressive export development program, we don't want to take away from any of these, but lower grade mineralization into the mill. So really focusing on optimization the operation and not mining stuff that potentially would not be ore in the current forms.

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Stephen David Walker, RBC Capital Markets, LLC, Research Division - Head of Global Mining Research and Analyst [6]

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Great. That's very helpful from a longer-term basis. Maybe a more specific question for Troy, if I might, Troy, is there sufficient infrastructure in place here currently and, I guess, over the next quarter to allow you to do the detailed drilling in and around and down plunge of Swan and in and around the down plunge of Eagle and Phoenix? Are you going to be able to buy year-end to clearly delineate those deposits? Or have they been clearly delineated, the Swan, the Lower Eagle and Lower Phoenix?

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Troy Fuller, Kirkland Lake Gold Ltd. - Director of Exploration in Australia [7]

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Yes. We have all the infrastructure in place, providing platforms for drilling into the extension of the Lower Phoenix system, so that's all there. We've currently drilled out the system down tons to about a 100-meter spacings. So with that confident by end of the year, we'll have a solid do for mineral resource established on that system.

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Stephen David Walker, RBC Capital Markets, LLC, Research Division - Head of Global Mining Research and Analyst [8]

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And does the Swan, in fact, continue to depth, and Eagle continue to depth of those geological features, the fold and -- folding features and intersections with the structures? Does that continue beyond the existing resource identified?

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Troy Fuller, Kirkland Lake Gold Ltd. - Director of Exploration in Australia [9]

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Yes. The Swan extensions will need to undertake some infill drilling, down plunged directly from the mineral reserve block, and that really will happen in the back half of this year. And that information will be incorporated into the end of the year...

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Operator [10]

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Your next 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 [11]

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Maybe first off on Fosterville here. Looking at Q2 grade, it was good, 39.9 gram per tonne. I guess, Ian talked about 11 stopes, about half the tonnage coming from Swan. On that, though, you're expecting an even better second half for 2019. Is that going to be based on grade? Are you planning on more stopes coming out of Swan and with a higher -- even higher average grade in the second half? Or is it partially based on tonnage?

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

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Go ahead, Ian.

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Ian Holland, Kirkland Lake Gold Ltd. - VP of Australian Operations [13]

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Yes. Thanks. It's almost entirely grade as I touched on, volume H2 expected to be pretty similar to H1 so it's really grade. The proportion of Swan is expected to be similar so it is that we're mining into some high-grade areas of the resource. And some of these uniform distribution of grade throughout the ore body, there are higher and lower zones. And in the second half, we expect to be mining through some higher zones. So that really drives the increase in H2.

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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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Yes. So you're expecting kind of a similar number of stopes, but higher grade into Swan.

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Ian Holland, Kirkland Lake Gold Ltd. - VP of Australian Operations [15]

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Correct. Yes.

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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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Okay. Okay. And then on the exploration front, I guess, Troy kind of mentioned it, but more specifically, I guess, you've been targeting -- you're right now in a position to target some of the Harrier Deeps, especially the anticline offsets. Those were some of the results we have been expecting earlier on in 2019, but you had to put the drift in. Now that you're targeting it, could we see some results coming out from those anticline offsets at Harrier Deeps before the end of 2019?

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

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Yes, we certainly can. We're commencing some lease drilling from the extension platform in the next week or 2. And we should have several holes down to depth in the anticline offset position by the end of the year.

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Cosmos Chiu, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research & Equity Research Analyst [18]

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And I guess, the current interpretation, the current theory behind it is still the anticline offsets could yield higher grades at Harrier Deeps?

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Ian Holland, Kirkland Lake Gold Ltd. - VP of Australian Operations [19]

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Yes, that's correct. Certainly, if we look at the Phoenix system, our highest grades are in the anticline offset position, whereas historically, the lower grades from the syncline offset position, the power and Harrier reserves around the syncline offset position. So we're quite optimistic that the Harrier offset has a lot of potential.

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Cosmos Chiu, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research & Equity Research Analyst [20]

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For sure. And maybe moving up North now in Australia, talking about the Northern Territory. It looks like you've spent quite a bit of money on exploration and development, or what you call exploration, the northern territories, $29 million in Q2 and overall about $50 million in the first half of 2019. You did some bulk samples here, 31,000 tonnes. I'm just wondering if you've given a go-ahead in terms of development of Northern Territory. And if not, how should we look at the potential return here, given all the money that you've put into the northern territories.

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Ian Holland, Kirkland Lake Gold Ltd. - VP of Australian Operations [21]

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Yes, I'll cover that one. Look, look, we're taking a really measured approach here, to be completely frank. And we do see the really significant potential in the Northern Territory. But we're not go-ahead production stage as yet. So as you say, what we've done is do a significant amount of drilling and some development in mining over the course of H1. That's going to continue over H2, and if anything, accelerate. But another important step there will be to do some trial processing as well. So we can truly gauge the performance of the Lantern ore body. Parallel to all of that is the work that we're doing on the other projects in the Northern Territory, because we really see some scale potentially. Again, there's no guarantees in this, and we're hurrying up quietly, but that's really the intent. We want to -- we plan to see -- we are aiming for a large, integrated, multi-mine operation, feeding a central mill. That's our intension.

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Cosmos Chiu, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research & Equity Research Analyst [22]

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I guess you're doing all this work, but is there any kind of sense in terms of timing of when you might be able to make a decision in terms of -- is it a go or no go? Or how should we look at it?

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Ian Holland, Kirkland Lake Gold Ltd. - VP of Australian Operations [23]

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We're likely to be doing some trial processing in Q4 this year. And our budget process will be the critical next step in that assessment phase. So whatever our schedules show us for next year and how is the business plan hanging together.

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

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Reading between the line, Cosmos, the fact that we're starting to do test mining, the fact that we are thinking of turning on our mill, we're working towards going. We're just taking baby steps right now. We're all in, so we're not just sitting around there. We're moving ahead. We are just moving ahead in stages.

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Cosmos Chiu, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research & Equity Research Analyst [25]

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For sure. Maybe a quick question for David here. It sounds like with the taxes, there's installments and whatnot. And it sounds like there's going to be a true-up in Q2 2020 based on the profitability in 2019. So should we be expecting like a big tax number in Q2 2020? And if that's the case, how can we -- before that beforehand, sort of calculate that number? Should I just take 2019 profitability multiplies by, say, like 30% or 35%, and then figure out what the installments were actually in 2019 and come up with that number? Could you give us a bit more detail?

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David Soares, Kirkland Lake Gold Ltd. - CFO [26]

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Yes, that's right. So basically, you take the effective tax rate for 2019, which is close to the statutory rate. And really, the large impact is in Australia, although Canada will be impacted similarly. But if you did that, you'd get pretty close to what the installment should be in Q2 2020.

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Cosmos Chiu, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research & Equity Research Analyst [27]

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Okay. And could you remind what's the statutory rate again in Australia and Canada?

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David Soares, Kirkland Lake Gold Ltd. - CFO [28]

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Above 30% in Australia and Canada, just slightly lower than that.

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Cosmos Chiu, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research & Equity Research Analyst [29]

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Okay, great. And maybe one last question here, coming back to Canada. The Holt complexed. The guidance for the year is 140,000, 150,000 ounces. You've done about 55,000 ounces so far. I know Holloway is coming in, and that should be an incremental 20,000 ounces in the second half, but you still need -- if I -- my mathematics is correct, you still need Holt and Taylor to improve in the second half to meet that guidance. Could you maybe run through what were some of the issues at Holt and Taylor? And we've -- we're now sort of into Q3 now, have you seen any good turnaround, so that it would give you confidence in terms of what's happening at those 2 operations?

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

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Well, we're thinking of -- in terms of that Holt complex, we expect to be on track to meet our guidance for the year. So we are expecting some improvements in the second half, definitely. You see the coming off of Holloway, we are -- the issue and some of the challenges there related -- relate to grade. And we do have the high royalty structure at Holt, which we're assessing. And we're not going to -- we're working at achieving our targets for the year. We are facing -- again, it was the grade. And how does that deal with in terms of the royalties and we don't -- we're not falling in love with our mines. If we don't think that we can get the cost structure and benefit to Kirkland Lake Gold, then we'll do what we need to do with those assets.

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David Soares, Kirkland Lake Gold Ltd. - CFO [31]

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And again, our long-term goal is USD 950 announced in undeferred cash, all-in sustaining costs of 650 or under in cash costs and 100,000 ounces plus a year in terms of production.

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Cosmos Chiu, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research & Equity Research Analyst [32]

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And you brought a royalty. And sorry, hopefully, I can have one more question here. Could you give us a quick update in terms of the state of Victoria and the proposed royalty and where it's at right now?

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Ian Holland, Kirkland Lake Gold Ltd. - VP of Australian Operations [33]

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Yes, I'll cover that one. So it was announced in the budget presentation of the budget announcement, it was still being worked through. We're in discussion with the government. We're hopeful for some adjustment to that, but it's too early to say. So really slow work in progress.

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Operator [34]

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(Operator Instructions) Your 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 [35]

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If I could ask 2 questions about exploration expense? First, from a purely accounting standpoint, how much of the outlays in dollars are not eligible to be capitalized like Eric's salary or if he takes a plane for Australia or different technical services you might buy from consulting geophysicists or geologists? And then second is the 85% capitalization rates suggest almost complete exploration success? Or could you give us a little color if there were 1 or 2 holes out of 1,000 or 2,000 that didn't hit gold.

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Anthony Paul Makuch, Kirkland Lake Gold Ltd. - President, CEO & Director [36]

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Good question. Thanks, John, for the question. I think most of the costs related to exploration are with the direct exploration cost themselves. So Eric's salary would be a corporate cost and obviously, allocated to the different areas where he does work, whether it's the Canadian operations or Australian operation, a portion of that would get sort of charged back. But with regards to the actual exploration work that was done, looking at each drill hole, where we're doing the work, how close that work was to existing reserves and our company's view on the benefit associated with that work or the future benefit associated with that work. We realize that, really, in method definitions for capitalization. And that's what we -- those are the adjustments that we made in Q2. I'm not sure if that answers you question.

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

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Also for the work at Robbin's Hill where you're tracing the old open pit to depth and Harrier where you're tracing the plunge to depth, is all that work being capitalized?

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

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Yes.

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

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I guess one final, more procedural question, just as I look at the stock price down a little bit this morning as you were off $0.02. Is there -- what is the first day that you're eligible to buy back stock after reporting earnings overnight? Is it tomorrow or Friday or Monday?

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David Soares, Kirkland Lake Gold Ltd. - CFO [40]

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On 2 full trading days, John.

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

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Some companies have third-party blind check blind authorizations where it's a different rule.

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Operator [42]

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We have no further questions at this time. I will now turn the call back over to Mark.

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Mark E. F. Utting, Kirkland Lake Gold Ltd. - VP of IR [43]

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Thanks very much, operator. And again, thanks, everyone, for participating in the call this morning. As you heard, we -- we're looking ahead to what we think will be 2 very good quarters to finish out 2019 that puts us on track to achieve our key operating guidance for the year. And we look forward to updating you on our operating performance as well as our exploration and the other parts of the company as well. Thanks very much. Have a good day.

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Operator [44]

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This concludes today's conference call. You may now disconnect.