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Edited Transcript of MND.TO earnings conference call or presentation 8-Aug-19 12:00pm GMT

Q2 2019 Mandalay Resources Corp Earnings Call

TORONTO Aug 31, 2019 (Thomson StreetEvents) -- Edited Transcript of Mandalay Resources Corp earnings conference call or presentation Thursday, August 8, 2019 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Dominic Duffy

Mandalay Resources Corporation - President, CEO & Non-Independent Director

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Conference Call Participants

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* Stephen Saroki;Equinox Partners, L.P.;Analyst

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Presentation

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Operator [1]

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Good morning. My name is Devin, and I will be your conference facilitator today. At this time, I'd like to welcome everyone to the Mandalay Resources Corporation Q2 2019 Financial Results Conference Call (Operator Instructions) As a reminder, this conference is being recorded.

This call contains forward-looking statements, which reflect the current expectations or beliefs of the company based on information currently available to the company. Forward-looking statements are subject to a number of risks and uncertainties that may cause the actual results of the company to differ materially from those discussed in the forward-looking statements.

Factors that could cause actual results or events to differ materially from the current expectations are disclosed under the heading Risk Factors and elsewhere in the company's annual information form dated March 28, 2019, available on SEDAR and the company's website.

Joining us on the call is Dominic Duffy, President, Chief Executive Officer and Director of Mandalay Resources. Mr. Duffy, you may begin.

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Dominic Duffy, Mandalay Resources Corporation - President, CEO & Non-Independent Director [2]

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Okay. Thank you very much. Thank you, everybody, for joining us on the call today. Today, I have Nick Dwyer, our CFO, also joining me on this call.

The second quarter for Mandalay was what I would consider a stable quarter. Cost of our Björkdal operation continued well with their high production numbers, and our Costerfield operation continues to be in a transition mode as it develops towards the Youle lode, which will significantly change the financial outlook of this -- that operation going forward.

Total revenue for the corporation for the quarter was $26.3 million. We had adjusted EBITDA of $4.1 million and a net loss before special items of $3 million or $0.04 per share.

At our Björkdal operation, we did maintain the first quarter production rates going into Q2, putting it in a positive financial position and slightly ahead with our year-to-date production figures. We generated $19.1 million of revenue from that operation. And part of that -- and due to our cost control measures, we were able to lower the cash cost to $818 per ounce. That's the best we've seen at that operation for quite a while.

While the pre -- due to previously released information about the open pit, that will be -- was going to be paused at the end of July. And as a result of that, we do expect to see further increase in the profit margin from that operation due to the reduction in overall cost. We also expect that, that will have no significant impact on our production at that operation for the remainder of the year, with open pit being paused. So we feel that Björkdal is in a very stable state of operation at the current time, and we're looking forward to seeing the improvements that we get from the current exploration drilling being carried out at that operation.

We did also process some high-grade skarn at that operation during the second quarter. It reported significantly higher grades than average that we get from the operation. And it really highlights the potential that we have at this operation for looking further into a type of deposit that historically has been overlooked at the Björkdal operation.

Costerfield. The good news for that operation is that our development to Youle continued on schedule and plan. And we are still forecasting that -- predict we will be producing from the Youle lode from Q2 through 2019. The Youle lode does have significantly higher grades than what we are currently producing, quite a bit more than double the gold grade, with antimony being slightly higher as well.

The production from Q2 was -- at Costerfield was predominantly from the Brunswick lode, which continues to be slightly lower than planned. This is mainly due to the poor ground conditions at that -- in that lode, increasing the dilution we are obtaining at the current time, and it also is slowing down production quite a bit. We are continuing to ramp up the short trading at that mine, and we are seeing some positive results related to the production rate in Brunswick as well as dilution control.

We also do have some slightly low recoveries from the Brunswick lode than what we are estimating due to the metallurgy of the Brunswick deposit. The good news is that moving into the Youle lode, both geotechnical information shows that the ground condition is significantly better so the production rate should be lifting.

And metallurgical testing from our core drilling has shown that recovery should be back to what we historically have timed from Costerfield operation once we move into Youle lode. It will be a ramp-up in the Youle lode so we will see over the coming quarters that our production will be lifting quarter-on-quarter.

Moving on to our exploration at Björkdal. We did kick off -- we have kicked off the drilling into the upper areas of the Aurora zone, the significant discovery that we found over the course of 2019. And we have started drilling into a Lake zone skarn deposit. As I mentioned earlier, the skarn has not been looked at historically at the Björkdal operation, and there are several areas we have identified that have potential for being high-grade deposits.

As we did start our exploration drilling later on this year, following the financing in Q2, we are -- we have not moved on from those original 2 programs at Björkdal today. But we do expect them to be closing out over the course of Q3 and then moving on to further projects.

At the Costerfield operation. We also had a late start-up of exploration at that site as well. We have kicked off the first deep hole program -- first hole into the deep hole program. The first hole is still advancing. That is directed under the Youle lode, and we have also begun drilling to the northern extent down to -- down dip of the Youle lode as well. They were the approved programs. We started off with the exploration this year, and we will be moving on to further programs following on from these pits. We will be releasing information on all of our exploration drilling later on in 2019.

In summary, for the company, we are in a stable financial position, with USD 25.7 million in cash at the end of the quarter. The Björkdal mine is operating and in a stable position. And we do expect that profitability to increase due to the pause in the open pit and as we move into -- further into Aurora zone we hope to be able to ramp up our production from that underground mine as well.

In Costerfield, we are on the doorstep of the Youle lode. That is what we have been developing into for the last year. So it's extremely exciting that we will be moving into that during Q4 and starting to see how that lode be highest and impacts the grades of what we'll be processing through the plant at Costerfield.

So I think we will say our economics begin to improve significantly from Q4 moving forward. And I would now like to open it up to any questions, if anybody is out there. Thank you, operator.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of [Ian Morrison], a private investor.

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Unidentified Participant, [2]

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I have just 3 points to raise in the form of a question. I'd like you to talk a little bit about your judgment on the antimony. I noticed the 18% drop that was reported in the recent statement. The second thing I'd like you to do is just to look forward 3 to 5 years in terms of the corporate goals and the strategy to get there. And then finally, just a few comments about risk factors that investors should be aware of.

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Dominic Duffy, Mandalay Resources Corporation - President, CEO & Non-Independent Director [3]

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Yes. So your first point relating to the antimony. So the drop-off on that is going back to the point I mentioned about dilution in the Brunswick lode. So that deposit is reporting the grade similar to what we have estimated but the ground conditions have resulted that in that when we are mining it. We do have more material coming in so that will slightly lower the grade of that deposit. We do -- we are putting in controls to ensure that the area is controlled with the short break. Just in case of -- I wasn't 100% sure, though you might have been asking actually about that mining price. If it is, then the actual price of that mine is very much controlled by the Chinese market. It is an industrial metal. And it is used almost predominantly for industrial construction, mainly used in flame retardant, mainly used in -- for screens and monitors, for bubble reduction, et cetera. So really, it goes with how the whole construction market and generally the flame retardant market within the world is moving. We would not expect it to drop any further, $6,000 does appear to be very low, right? Historically, it has got -- it's right around about $8,000. So in general, we are hoping for an uplift and the antimony prices goes forward. But that being said, also, as we move into the Youle lode. I did mention that our antimony grade lifts slightly in the Youle lode at Costerfield, yet the gold grade is more than doubling as we move into the Youle lode. So antimony becomes a much less relevant metal of the 2 going forward over the next 3 years at Costerfield mine.

Your second point, sorry, I can't -- we're sorry, it was how we're looking for the 5 years going forward. At our Costerfield mine, it is dependent on exploration success, obviously. If you look at our reserves, you can see we do need to increase them. We are ramping up our exploration drilling up to get that deposit. We are drilling to the north of Youle lode currently, then we move on to drilling targets that we have generated over the course of the last 2 years. And we will -- we are also drilling deep hole at the current time to see if we can. [Truth is] really testing as a result of what has occurred at Costerfield mine, and so what the geological information that is showing us that we should be expecting at depth from this operation. Your third point, sorry, I can't recall.

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Unidentified Participant, [4]

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It was around risk.

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Dominic Duffy, Mandalay Resources Corporation - President, CEO & Non-Independent Director [5]

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Risk. So obviously, metal prices are one of the larger risks that people are concerned about in relation to Costerfield. It would be related to lack of success at our -- with our exploration. But one thing is we've never spent too much money on exploration at Costerfield. And moving forward, I do plan to be putting more money into our drilling than what has historically occurred because we've always set around about 3 years mine life at that deposit. In our Björkdal operation, we do have -- that does have a long future in front of us. And virtually, everywhere we're drilling for our extension, and we're drilling down dip, so deposit just does continue. So mine life isn't a concern there. The highest risk is being able to maintain our current production rate and actually lift on top of that. I wouldn't classify that as high-risk zone because what -- we're finding with the increase of the deposit, the size of it and the dimensions at best of that deposit. We are in quite stable jurisdictions in both Sweden and Australia, so would not expect that legislative risk or contrary risk are high factors related to those operations.

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Operator [6]

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Our next question comes from the line of Stephen Saroki with Equinox Partners.

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Stephen Saroki;Equinox Partners, L.P.;Analyst, [7]

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Dominic, could you give us some color on recent developments at Cerro Bayo, and what's the time line for that?

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Dominic Duffy, Mandalay Resources Corporation - President, CEO & Non-Independent Director [8]

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Yes. So we have increased with -- we have a partner coming in with Equus Mining. They are moving into what is an option agreement, where they'd be -- they're given 18 months to perform exploration drilling on the property. They do own a neighboring concession that has had some very exciting results to date.

So long term, their plan, obviously, would be to combine the 2 properties. They have very good processing -- or we have very good processing facility at our Cerro Bayo operation. We do have reserves on the books around the like, which is Laguna Verde, which are more complicated. But we have very attractive deposit in the Marcela mine that has -- is in a separate area that was related to Cerro Bayo mine. Then, from what I understand, we'll be drilling around there and other targets. I have a lot of exciting targets. The hope is that I can prove something up and following on from their 18 months.

Option agreement. We come to agreement where they would take out the property. There is the option if both parties do agree to continue for further 18 months of drilling. We are continuing to work with Equus because they -- if they're successful, we are successful at this asset. We do see a future at this deposit. We are still -- continuing on with all the permitting needs required for a restart of this operation. It still isn't in the position that could restart because of some outstanding permits required around Laguna Verde, for restarting those mines. So that part of the reason is that Equus feels that they have some high-potential targets outside of the Laguna Verde area so all of that might be easier to get permitted. So we are working with them, and we do expect that they will have success over the coming 1.5 years. But it is not our primary focus at the current time due to what is going to happen at our Costerfield mine and what is -- as we move into Youle and what is happening at our Björkdal mine with our ramp-up in production.

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Stephen Saroki;Equinox Partners, L.P.;Analyst, [9]

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Just as an update, what's the current maintenance expense for Cerro Bayo on an annual basis?

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Dominic Duffy, Mandalay Resources Corporation - President, CEO & Non-Independent Director [10]

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It is $2 million to $3 million going into 2019, would expect.

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Operator [11]

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Our next question comes from the line of [Ron McClain], a private investor.

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Unidentified Participant, [12]

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Dominic, just want to comment first that the turnaround at Björkdal has been pretty spectacular.

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Dominic Duffy, Mandalay Resources Corporation - President, CEO & Non-Independent Director [13]

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Yes. Thanks, Ron, it's been a lot of hard work.

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Unidentified Participant, [14]

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Yes, I noticed that -- it's just a jaw, a bit of a jaw dropper when you know the Q1 numbers came out. And going forward, it looks like you could hit your 2020 estimated production numbers there.

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Dominic Duffy, Mandalay Resources Corporation - President, CEO & Non-Independent Director [15]

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Yes. So we did give guidance back at the start of 2019 that does have us -- so pretty much within our guidance numbers at the current time, so -- at the upper limit of them. We are not anticipating changing the guidance at the current time, but we also did put our guidance for 2 years going forward as well. So we were confident of this uplift in production, and we are also confident of that lifting over the next 2 years as well, due to these changes. That is also anticipating the pause in the open pit. The bulk of our production had been coming from the underground mine. And we really do not see any major negative impact on the production from that mine as a result of pausing up open pit, just an increase in our profitability from a reduction of one of the major costs out of the operation.

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Unidentified Participant, [16]

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Do you think with the underground exploration drilling upwards that maybe the open pit operation is going to start moving over into, I think it's called North Lake?

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Dominic Duffy, Mandalay Resources Corporation - President, CEO & Non-Independent Director [17]

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Yes. So that will be probably slightly north -- yes, it's around about the Lake zone. So we aren't currently drilling up from underground. Depending the results of what we have, we then possibly would move on to joining it from the open pit. But our next target for the Aurora zone is actually drilling it to depth because from our previously released exploration information, you can see that the high grades are actually down deep in that deposit. It does narrow down, but the grades are extremely attractive to us. There is a possibility that it could become an open pit operation again above the Lake zone. That would require quite a bit of permitting though. So you probably would not see that until at least 4 years from when the drilling did occur at surface. So it's not our primary focus at the current time. For us, it would be extremely attractive if we did find another significant open pit in that area. So I can guarantee that it would be drilled -- it will be drilled in the future. It may not be this year because as you know, the most profitable years in open pits, if they're near surface are the first years. So it will be a focus for us moving forward. But we are extremely excited with what we have found at Aurora and around Aurora to date. We are still figuring out how we mine this whole deposit because being around about 4x plus to what -- which is the size of deposits we have mined that operation, there is a lot to figure out as to how we do mine this deposit and coming out with our schedule. Long-term life of mine plans still does require a bit of work that will take us through to the end of 2019 before we can really give any guidance to what we expect from this operation over the coming years. So can't really give much guidance because we're still figuring it out.

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Unidentified Participant, [18]

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Are you going to do -- is there a possibility of doing a similar deep hole drill program at the Björkdal mine?

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Dominic Duffy, Mandalay Resources Corporation - President, CEO & Non-Independent Director [19]

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Not at the current time because actually coming up with a drill station to go down deep, we could go quite a bit further back into the mine. With Björkdal, because we -- it's such a sizable deposit at the current time, we find we don't have to step out significant amounts to add reserves. So it will just be a continual step down drilling this Aurora zone as probably 100-meter step-outs and the likes. Just to say where exactly these deposit does end. It's not one where I do not feel we have to do the significant deep hole to try and justify if it goes down a hell of a long way. And you would -- it's not the type of deposit you would expect through this deposit, it continues more laterally than at depth. It's always mainly gradual step down as we move along. We have found Aurora 2 bit deeper than what we originally anticipated. But the attractive thing has been, it's just continued up above the model contact significantly. That's what's made it very exciting. There are some things that -- down data that do have spiked our interest, that we will be following up on under Aurora zone but still when you consider we only discovered this deposit a year ago. We have been drilling up. But there's still a lot more to understand there. Actually, how big this deposit is going to be. And we don't want to do any big jumps at the current time.

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Unidentified Participant, [20]

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Sounds very encouraging. On the Costerfield side, do you still anticipate hitting your production numbers of 23,000 ounces to 30,000 ounces?

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Dominic Duffy, Mandalay Resources Corporation - President, CEO & Non-Independent Director [21]

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At the moment, we are not changing guidance. We have to see how the Youle lode is performing. So we do expect, obviously, the large bulk of our guidance numbers for this year are expected to come in Q4. If we were to have to adjust the Costerfield numbers down or the Björkdal numbers up, that would probably be -- we will have a better understanding of whether that would have to be done early on in Q4. But at the moment, we are holding both guidance figures steady, which would..

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Unidentified Participant, [22]

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Okay. You mentioned that you're at the -- on the doorstep at the Youle lode. How long is it going to take to, I think, in the last -- on the Q1 call, you mentioned you had to put some infrastructure in place. I'm not sure what it is. Is it water pumps and power and other...

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Dominic Duffy, Mandalay Resources Corporation - President, CEO & Non-Independent Director [23]

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Yes. So the main infrastructure is actually related to the ventilation. We so pumping the pump stations, et cetera, quite minor. The main one is putting a vent down the ventilation raise. So we are just kicking off the pilot hole for that over the coming week or 2. There is always risk associated with doing the vent raise although this is quite a short one 200 to 300 meters. So we are not anticipating any major issues with that then installation of the vent fans underground. We -- we do have enough ventilation at Youle that we could actually begin development along the vent without that being completed. But we do estimate that, that will be done by the end of Q3 or early in Q4.

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Unidentified Participant, [24]

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Okay. So will you be mining even as you're putting the balance, the new ventilation in there?

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Dominic Duffy, Mandalay Resources Corporation - President, CEO & Non-Independent Director [25]

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We'll probably be doing some early development, possibly in the Youle lode, while the primary ventilation is being established. We do have secondary ventilation, that does supply the legislate air flow and definitely enough that the workers can work comfortably down there.

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Unidentified Participant, [26]

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Fabulous. Just one other question. I was wondering about -- wondering when you would start drilling in the other 2 corridors, known as True Blue and the Brown's digging Robinson reef.

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Dominic Duffy, Mandalay Resources Corporation - President, CEO & Non-Independent Director [27]

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So at the moment, we are still working through that. But with our scheduled deep field exploration, the site and [outboard] to establish what are the primary targets. So it is -- and because we did kick off our exploration late this year, following on from our equity financing, we might not be touching them this year. I would like to, but it may be pushing over through into 2020. We're still working through that. We are -- we do have further targets to the north of Youle that possibly will be a high priority than starting on these other corridors. But there are a lot of bridge targets out there. And with our exploration release, we haven't set a date for it but it will be later on in 2019. We will be highlighting next targets with that press release also. Sorry, I can't give you much light on that at the current time. We are still working through them.

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Unidentified Participant, [28]

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Okay. My last question actually is, can you comment on the possible release of the $15 million that's held in reserve against the gold bonds? Do you think that there's a possibility of having that released as you continue to pay it down?

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Dominic Duffy, Mandalay Resources Corporation - President, CEO & Non-Independent Director [29]

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We are not currently paying them, the last conversion we have for the convertible gold and that was in January of this year. We have not had any further conversions on that. At the current time, it's not much of a concern for us because we do have sufficient cash and reserve, but that does not impact us. Albeit our operation is profitable and Costerfield moves into the extremely profitable as we move as Youle is ramped up. It would be good to free that up to have further cash available, but it is not a concern at the current time.

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Operator [30]

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There appear to be no further questions at this time. I'd like to turn the floor back over to Mr. Duffy for closing remarks.

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Dominic Duffy, Mandalay Resources Corporation - President, CEO & Non-Independent Director [31]

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There are no further closing remarks. Thank you very much, everybody, for jumping on the call today.

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Operator [32]

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This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.