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Edited Transcript of NMI.TO earnings conference call or presentation 29-Mar-17 3:00pm GMT

Thomson Reuters StreetEvents

Q4 2016 Kirkland Lake Gold Ltd Earnings Call

Mar 29, 2017 (Thomson StreetEvents) -- Edited Transcript of Kirkland Lake Gold Ltd earnings conference call or presentation Wednesday, March 29, 2017 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Anthony Paul Makuch

Kirkland Lake Gold LTD. - CEO, President and Executive Director

* Darren Hall

Kirkland Lake Gold LTD. - COO

* Douglas F. Cater

Kirkland Lake Gold LTD. - VP of Exploration

* John Landmark

Kirkland Lake Gold LTD. - VP of Exploration for Australia

* Philip Chow Yee

Kirkland Lake Gold LTD. - CFO and EVP

* Pierre Rocque

Kirkland Lake Gold LTD. - VP of Mining Engineering

* Ryan King

Kirkland Lake Gold LTD. - VP of IR

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Conference Call Participants

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* Craig Johnston

Scotiabank Global Banking and Markets, Research Division - Analyst

* John Charles Tumazos

John Tumazos Very Independent Research, LLC - President and CEO

* Stuart McDougall

M Partners Inc., Research Division - Mining Analyst

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen, and welcome to the Kirkland Lake Gold Earnings Call for the Fourth Quarter and Full Year of 2016. (Operator Instructions) Please note that this call is being recorded today, Wednesday, March 29, 2017, at 11:00 a.m. Eastern Time. I would now like to turn the meeting over to one of your hosts for today's call, Ryan King, Vice President of Investor Relations. Please go ahead.

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Ryan King, Kirkland Lake Gold LTD. - VP of IR [2]

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Thank you, operator, and good morning, everyone. With me on the call today are Tony Makuch, President and Chief Executive Officer; Philip Yee, Executive Vice President and Chief Financial Officer; Darren Hall, Chief Operating Officer; Doug Cater, Vice President of Exploration, Canada; and John Landmark, Vice President of Exploration, Australia; Alasdair Federico, Executive Vice President, Corporate Affairs; Pierre Rocque, Vice President, Technical Services; Jen Wagner, Corporate Legal Counsel; Meri Verli, Senior Vice President, Finance; and Tina Ouellette, Executive Vice President, Human Resources; and Galina Meleger, Corporate Communications. Today we'll be providing comments on our results for the 3 and 12 months ended December 31, 2016 for Kirkland Lake Gold and for the newly acquired Australian assets as per the closing of the business combination with Newmarket Gold on November 30, 2016. We'll then open up the call for Q&A. The slide deck that we will be referencing during this call is available on our website at www.klgold.com under the Investor Relations Events section.

Before we get started, I'd like to direct everyone to our forward-looking statement on Slide 3. Our remarks and answers to your questions today may contain forward-looking information about future events on the company's future performance. Please refer to the cautionary note in Slide 3 of this presentation and the forward-looking information set out in our press release dated March 29, 2017 and the MD&A for the 3 months ended and year ended December 31, 2016 filed on SEDAR.

As a reminder, Kirkland Lake Gold changed its year-end from an April 30 fiscal year-end to a December 31 calendar year-end effective January 1, 2016. As such, for comparative purposes, we are comparing to the closest reporting period in the previous year. Q4 2016 is for the 3 months ended December 31, 2016 and includes 1 month of production from the newly acquired Australian operation compared against 2 months ended December 31, 2015 as a result of the change in reporting period. 2016 full year results for the 12 months ended December 31, 2016 and include the newly acquired Australian operations from November 30, 2016 onward and the Holt Mine Complex from January 26, 2016 after the acquisition of St Andrew Goldfields compared against 8 months ended December 31, 2015 as a result of the change in the reporting period, including operational results from the former Kirkland Lake Gold Inc., from the Macassa Mine Complex. All figures are in U.S. dollars unless otherwise stated.

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

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Anthony Paul Makuch, Kirkland Lake Gold LTD. - CEO, President and Executive Director [3]

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Okay. Thank you, Ryan, and good morning, everyone, on the call, and anybody later on who may be listening on the webcast, welcome and thank you for joining us today for the 2016 Kirkland Lake Gold Fourth Quarter and Full Year Financial Results Conference Call. And as we say -- and this is the first for the new Kirkland Lake Gold Limited.

Before I begin, I would like to acknowledge and thank the over 2,000 people at Kirkland Lake Gold, the contractors, suppliers and all the others that work with us in both Canada and Australia who have done an excellent job and have contributed to generating the results in 2016 that we get to present today. We here are privileged to have the opportunity to present these results and basically credit from the hard work of others, so thank you very much for your efforts.

I would also like to formally acknowledge and welcome the new management appointments to the Kirkland Lake Gold team. The new management brings a wealth of expertise and will enable the company to optimize the performance of the global portfolio of gold mines, positioning us to deliver on our targets and create superior shareholder value.

Okay. So now beginning on Slide 5, Kirkland Lake Gold realized record 2016 and fourth quarter revenue based on record gold sales and a strong gold price in 2016. I'm also very pleased to say that the company begins 2017 well financed with a strong balance sheet and a cash position of over $235 million.

Moving on to Slide 6. 2016 and Q4 cash cost and all-in sustaining costs outperformed guidance. Kirkland Lake Gold delivered a record low 2016 operating cash cost per ounce of $571, below the lower range of our operating cost guidance of $600 per ounce. Operating cost per ounce for the fourth quarter totaled $533, reflecting record operating performance at our flagship Macassa and Fosterville Mine, which realized record low operating cost of $421 per ounce and $420 per ounce respectively, so pretty close to each other.

Unit sustaining -- all in -- unit all-in sustaining costs during 2016 was $923 per ounce, again below the lower range of guidance of $1,000 per ounce. And for the quarter, all-in sustaining costs were $883 per ounce, reflecting the increasing grade in recovery profiles at our flagship mines and a focus on operational improvements company-wide.

Continuing with our financial highlights now on Slide 7. The company reported 2016 earnings per share of $0.35 or CAD 0.46 and 2016 adjusted earnings per share of $0.62 or CAD 0.82 when excluding onetime costs associated with the Newmarket and St Andrew transactions.

Q4 earnings per share was $0.02 or CAD 0.03 and adjusted net earnings per share was $0.19 or CAD 0.25 when excluding the same onetime cost. And for the 2016 full year, we have generated significant operating cash flow from operations of over $180 million or $1.49 per share and free cash flow of $107 million or $0.88 per share.

Slide -- now, I'm going to Slide 8. The operations team in both Canada and Australia delivered this record performance, obtaining consolidated pro forma gold production of over 125,000 ounces for the quarter and over 540,000 ounces for the 2016 full year. On a consolidated attributable basis, fourth quarter production exceeded 106,000 ounces and 2016 year-end production was approximately 314,000 ounces. These include 1 month of December from the newly acquired Australian mines.

During the fourth quarter and for the full year 2016, exceptional record performance was led by our flagship operations from Macassa and Fosterville mines. As a result, both business units from Canada and Australia completed the year by exceeding previously announced production guidance levels.

Strong quarterly production was led by Macassa Mine in Canada totaling 52,318 ounces based on a record mine grade of 21.6 grams per tonne and record mill recovery of 97.6%. Additionally, the Fosterville mine in Australia achieved a record gold production of over 44,000 ounces of gold based on, again, record grade of 8.5 grams per tonne and record recovery of 92.4%.

On Slide 9, as per our financial results and record operating results indicate, 2016 was a transformational year for Kirkland Lake Gold. As we merged 3 companies, we created a new mid-tier gold producer. Yesterday, we provided a very positive update to our 2016 mineral reserves and resources. Notably, we increased our mineral reserves at our flagship Macassa Mine by over 37% to 2 million ounces of gold driven by a 7% grade increase to over 20 grams per tonne. At Fosterville, mineral reserves increased by 66% to over 640,000 ounces, a gain driven by significant grade increase more so, though, at 27% increase to 9.2 grams per tonne.

During the fourth quarter, we also announced the 1% buyback on our NSR with Franco Nevada to reduce the royalty rate on gold revenue at the Macassa Mine from 2.5% to 1.5%. As supported by our updated mineral reserves, this is a world-class deposit that will be producing gold for well over a decade and was the right decision for the company and the shareholders.

This morning, we also announced the very exciting corporate -- core corporate development, with the initiation of a dividend policy. I'm pleased to say that the Board of Directors approved the payment of the quarterly dividend of CAD 0.01 per share payable on July 14, 2017 to shareholders of record as of the close of business on June 30, 2017. This announcement demonstrates our confidence in the growth potential, free cash flow generation and supports our commitment to deliver value to our shareholders.

Moving on to Slide 10. Following the closing of the business combination with Newmarket Gold, we provided 2017 guidance which established Kirkland Lake Gold as a new mid-tier gold producer. In terms of sustainable production from our 5 underground gold mines in 2017, we expect to produce between 500,000 and 525,000 ounces of gold, at the high end of our guidance range, approximately 75% of total production will come from our cornerstone mines, including the Macassa, Fosterville and Taylor. And during 2017, we are focused on continuing to deliver high quality production with low consolidated cash cost of $625 to $675 per ounce and all-in sustaining cost of $950 to $1,000 per ounce.

Our assets are located in some of the most prolific gold districts in both Canada and Australia. Over the past few years, investment into exploration has been limited on these assets and therefore we believe the discovery and expansion potential was very significant. We are committed to spend $45 million to $55 million and we did this year with a clear goal to increase shareholder value. As Doug Cater and John Landmark will attest to later in the call, exploration success to date on near mine targets have been delivering exciting results from recently announced drill programs. And one of note is the 1,429 grams per tonne or 45 ounces per tonne over 15 meters with an estimated true width of about 5 meters at Fosterville.

Looking at sustaining capital, we want to invest responsibly into our mines to not only grow production to fill our mills, which all have excess capacity at this time, but to also demonstrate long-term sustainability of these operations. We see greater gram of growth across all of our mines because of the exploration potential and the excess mill capacity and are therefore taking the necessary steps to take advantage of this opportunity. For example, this is some simple things, an additional 100 tonnes per day at current grades mined at Macassa would lead to over $10 million of additional free cash flow for the company. We are going to work hard to start getting -- realizing that value back for our shareholders.

I'll now turn the call over to Phil Yee, our Chief Financial Officer, to review the financial results for the fourth quarter and 2016 year-end.

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Philip Chow Yee, Kirkland Lake Gold LTD. - CFO and EVP [4]

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Thank you, Tony. Just before we get started, I just want to issue a second reminder to everybody that Kirkland Lake Gold has changed its reporting currency to U.S. dollars effective December 31, 2016 reporting period. So all the figures that I'm going to reference here are in U.S. dollars unless otherwise stated.

On Slide 12, I'm pleased to report a strong cash position at December 31, 2016 of $234.9 million. Working capital for the same period totaled $92.3 million. An important point to note is that working capital includes the full debt portion of the convertible debentures of $85 million, which mature in 2017 and are classified as current liabilities in 2017. Working capital also includes the current portion of finance leases totaling $15.6 million.

As compared to the 8 month ended December 31, 2015 and the cash balance of $67.7 million, the increase in the company's overall financial position is largely the result of increased production resulting from the acquisition of both St Andrew Goldfields and Newmarket Gold in 2016. The increase in cash reflects $180.9 million of cash flow from operations that was generated throughout 2016 and $22.4 million received from the issuance of common shares of the company. The company also acquired $76.1 million in cash that came with the acquisitions of St Andrew Goldfields and Newmarket in 2016.

With regards to the company's convertible unsecured subordinated debentures that are scheduled to mature in 2017, the first tranche, totaling CAD 56.8 million with a 6% coupon matures on June 30, 2017. The second tranche totaling CAD 62 million with a 7.5% coupon matures on December 31, 2017. Based on the company's financial strength, strong cash and working capital position, management believes the company has the flexibility to adequately manage the current levels of the convertible debentures as they become due. Net of the convertible debentures, the company has a strong cash position of $149.9 million. Kirkland Lake Gold is currently completely unhedged in order to benefit fully from the increases in the price of gold.

Moving on to Slide 13. We have outlined several key financial highlights for the 2016 year-end and for the fourth quarter. As outlined in the MD&A, the prior comparative period in 2015 only represents the results for the Macassa Mine for an 8-month stub year, while 2016 represents a full year and includes the operations of the Holt Mine Complex from January 26, 2016 onwards and the Australian operations from November 30, 2016 onwards. Full comparative figures are available in the MD&A document.

For the 2016 full year, record production resulted in the sale of 329,489 ounces of gold at an average realized gold price of $1,234 per ounce. This generated revenue of $406 million. The revenues for 2016 increased significantly when compared to the prior period.

During 2016, the average monthly revenue was $33.9 million, compared to the 8-month stub year ending December 31, 2015, which had an average monthly revenue of $14.5 million. This represents an increase of over 130%, attributable to increased gold sales reflecting the added production from the Holt Mine Complex and the Australian operations as well as a higher average realized price of gold in 2016.

In terms of costs, total 2016 full year production cost of $198.4 million, royalty expense of $15.6 million and depletion and depreciation of $59.1 million were incurred to arrive at net earnings per mine operations of $133.6 million.

As Tony mentioned earlier, during the quarter, the company agreed to terms with Franco Nevada Holdings to buy back a 1% net smelter royalty on the company's landholdings in the Kirkland Lake Camp for $30.7 million, reducing the company's royalty rate on gold revenue from Macassa from 2.5% to 1.5%. So effective at the start of November 2016, the company is now paying reduced NSR rate of 1.5% on Macassa gold revenues.

Other notable expenses for the full year 2016 include $17.8 million for transaction costs, including $15.5 million associated with the Newmarket business combination, which were incurred in Q4 of 2016 and $2.3 million associated with the acquisition of St Andrew Goldfields in Q1 of 2016.

In addition, the company posted care and maintenance cost of $4.1 million related to the transition of the Stawell gold mine in Australia to a state of care and maintenance and which is mainly related to onetime severance payments made on December 31, which was the date of notice. Stawell will be maintained in a production ready state with the intent of restarting the operations in the future with meaningful and enhanced economics and pending successful exploration programs being completed. There were no such costs incurred in 2015.

Looking to the bottom line. The company posted 2016 net earnings of $42.1 million or $0.35 per basic share based on a weighted number of common shares outstanding of 121.2 million. Net earnings for the full year includes growth exploration expense of $15.8 million as the company focused on growing its resources, all the while continuing to maintain strong cash flow generation.

For the fourth quarter, the company reported net earnings of $3.1 million or $0.02 per basic share based on the weighted average number of common shares outstanding of 146.5 million. Fourth quarter net earnings were predominantly impacted by onetime costs incurred, including the previously mentioned transaction cost and care and maintenance costs.

From an adjusted earnings perspective, excluding the onetime cost, resulted in full year 2016 adjusted net earnings of $75.3 million or $0.62 per basic share. For the fourth quarter of 2016, adjusted net earnings was $27.9 million or $0.19 per basic share after adjusting for the onetime costs.

In terms of cash flow, the company's operations generated $180.9 million or $1.49 per basic share in 2016 as compared to $39.4 million for the comparative period in 2015. The significant increase in operating cash flows reflects the increase in revenue as a result of record production and higher gold prices in 2016. This reflected the added production from the Holt Mine Complex and the Australian operations.

I'm also pleased to announce that the company completed the 2016 year with strong free cash flow of $107.2 million or $0.88 per basic share based on operating cash flow, less mineral property additions and property, plant and equipment. Overall, Kirkland Lake Gold delivered record fourth quarter and full year financial results, and I look forward to continued success from our newly expanded operating base that is positioned to generate strong free cash flow from high quality ounces.

With that, I'll turn it over to Darren Hall, our Chief Operating Officer, for a review of the operations.

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Darren Hall, Kirkland Lake Gold LTD. - COO [5]

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Thank you, Phil, and good morning, everybody. Safety is a value at Kirkland Lake Gold and we are committed to providing a safe and healthy workplace for all employees and business partners. As we continue on our journey to 0 harm, I'm pleased to report a 28% reduction in our total reportable injury frequency rate in 2016 compared to full year 2015.

Turning to Slide 15. I'd like to provide some reserve highlights from our recent reserve release. Throughout 2016, investment in our flagship operations Macassa and Fosterville have yielded significant positive results net of mining completion. Particularly encouraging is the increase in both tonnes and grade at both properties, strengthening our future.

Macassa reserves increased from December 2014 by 37% to just over 2 million ounces with tonnes increasing 28% and grades increasing by 7%. Fosterville reserves increased from December 2015 by 66% to 643,000 ounces with tonnes increasing 31% and grades increasing 27%. Fosterville's in situ future reserves increased over 100% to 490,000 ounces at an average grade of 9.8 grams per tonne.

Total 2016 Canadian reserves increased 20% over 2014 to 2.75 million ounces. Total 2016 Australian reserves increased 24% over 2015 to 952,000 ounces, mainly attributable to the 66% increase in reserves at Fosterville, which was underpinned by the high grade visible gold down-plunge extensions to the Lower Phoenix and Harrier zones.

Turning to Slide 16. Consolidated pro forma 2016 production of 303,027 ounces was led by Macassa, which delivered a record production of 175,167 ounces. Macassa's 2016 production was underpinned by record material movement, record run of mine grades averaging 16.52 grams per tonne and record recoveries of 97.1%.

Fourth quarter production totaled 52,319 ounces, a 22% increase over Q3 2016. Quarter-over-quarter, the mine continued to deliver increasing production with grades continuing to improve with dip, with fourth quarter grade averaging 21.6 grams per tonne. As a result of these improvements, cost continued to trend down compared to the prior year, with the mine delivering fourth quarter operating cost of $421 per ounce and all-in sustaining cost of $834 per ounce.

Turning to Slide 17. The company's newest mine, Taylor, successfully completed its first full year of production. On a pro forma basis, full year production from Taylor was 199,231 tons, grading 6.9 grams per tonne, yielding 42,639 ounces on mill recoveries of 96.5%. The operating cost -- cash -- sorry, the operating cost per ounce and all-in sustaining cost per ounce for the 11 months ended December 31, 2016 were $438 and $709, respectively. The low-cost Taylor Mine is a cornerstone asset for the company with significant exploration potential along the prolific mineral rich Porcupine-Destor Fault.

Moving to the Holt Mine on Slide 18. Fourth quarter production totaled 15,761 ounces of gold, the highest of any quarter in 2016. On a pro forma basis, 2016 full year production from Holt was 416,048 tons grading 4.52 grams per tonne, yielding 57,086 ounces on mill recoveries of 94.5%. Fourth quarter operating costs per ounce and all-in sustaining costs per ounce were $542 and $1,055, respectively. Unit cost continue to be positively impacted by a conscious focus on responsible spending at the site.

Turning to Slide 19. Fosterville delivered record annual results, delivering 2016 pro forma production of 151,755 ounces, underpinned by record grade of 7.55 grams per tonne and recovery of 90.1%. During the quarter, mining focused on optimizing the extraction of high grade lenses on multiple levels in the Lower Phoenix area. Fosterville delivered record operating cash cost per ounce of $420 and all-in sustaining cost per ounce of $641 for the month of December.

Turning to the Northern Territory on Slide 20. Cosmo Mine delivered pro forma 2016 production of 55,765 ounces at an average grade of 2.9 grams per tonne and 93.6% recovery. December 2016 operating cash costs and all-in sustaining cost per ounce were $1,048 and $1,173, respectively, from production of 52,789 mine tonnes at 3 grams per tonne, which improved over the Q3 2016 monthly average of 47,030 tonnes at 2.5 grams per tonne. Mine performance improved as a result of flexibility from development into the Redbelly and Taipan Lodes.

I will now pass it over to Doug Cater, Vice President of Exploration, Canada, to provide an update on Canadian exploration activities.

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Douglas F. Cater, Kirkland Lake Gold LTD. - VP of Exploration [6]

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Thank you, Darren. Management continues to invest in growth programs with the aim on delineating near-term resources growth at our Canadian operating mines. For the 2016 full year, the company invested approximately $14.5 million in growth exploration expenditures, consisting of multiple drill programs at Macassa, Taylor and Holloway operations. At the peak of the exploration program during 2016, 15 drill rigs were in operation across our Canadian district scale land package of 120 kilometers of strike length along the prolific Porcupine-Destor Fault Zone known as the Holt Complex and on our 10-kilometer-long claim surrounding the Macassa Mine.

Turning to Slide 22. The Macassa Mine remains one of the highest grade gold mines in the world, with the discovery of the SMC, driving great improvement at depth and results from ongoing drilling to likely provide further growth in adding higher-margin tonnes to augment mill feed. For the full 2016 full year, exploration programs at Macassa were focused on underground drilling and drifting and includes the delineation of the SMC from the 5,300 level and testing the '04 and '05 breaks from the 40 to 50 level. Over the year, a total of 99,000 meters were drilled from 120 holes, including surface and underground programs. With strong ongoing results from drilling in 2016 from the '04 break zone above the 3,400 elevation, the company intends on continuing to test the '04 break mineralization with the aim of adding another mining horizon, adding between 100 and 200 tonnes per day to current throughput rates.

Recent underground drilling during Q4 on the 5,300 level continued to focus on defining the easterly and westerly strike extension of the SMC. Underground drilling results returned outstanding interceptions, including 651.8 gram per tonne gold over 3.8 meters, 40.1 gram per tonne gold over 3 meters and 97.7 gram per tonne gold over 1.6 meters. The high-grade SMC Zone has now been defined over a strike length of 1,300 meters and a vertical extent of 690 meters with the zone being present down to the 7,000 elevation. Recent drill results from the SMC program continues to support the view that the system remains open for expansion.

The company is in the process of extending the 5,300 level of exploration drift further to the east, currently at about 30 meters, closing the almost 1,500 meter gap between the current known extent of the SMC mineralization and the regional surface holes that encountered previously reported SMC style mineralization.

The company is currently compiling and interpreting the results of the 2016 drill program. However, assay results from the program continue to return significant intercepts containing high-grade mineralization.

Turning to Slide 23. At our newest operating asset, the Taylor Mine reported new discoveries and extensions to mineralization from 2016 exploration results. During 2016, a total of 22,000 meters consisting of 13,400 meters of surface and 8,400 meters of underground core was drilled. Recent drilling targeted new or prospective mineralized extensions situated both at depth and along strike to the east of the Shaft Deposit and west of the WPZ, which includes the 1003, 1004 and 1008 zones.

Two exploration drifts have been budgeted for 2017 totaling 300 meters of lateral development. 100 meters have been allocated to the 4 30 east exploration drift, which will provide a platform to explore the easterly plunge of the Shaft Deposit at depth currently developed at 50 meters.

Recent highlights intercept includes surface drilling west of the WPZ, 300 meters from the edge of known mineralization at the WPZ deposit, intersected 10.31 gram per tonne gold over 3.2 meters and 13.91 gram per tonne gold over 1.5 meters. Follow-up drilling is underway with 2 surface drill rigs.

Underground exploration drilling outside of the WPZ near the 1004 and 1003 zones returns 9.5 gram per tonne gold over 4.5 meters, up-dip of the 1004 zone and 39.62 gram per tonne gold over 1.1 meters, located 330 meters down-dip of existing development, in an area with very minimal drilling, providing a suitable target for follow-up in 2017.

In addition, during 2016, an airborne magnetics, electromagnetic survey was recently flown over many of our claim blocks located along the Porcupine-Destor Fault Zone, with survey results being incorporated into our targeting exercises. This type of survey has the capability to see down to a depth of 500 meters below surface.

I'll now pass it over to John Landmark, Vice President, Exploration, Australia to provide an update on exploration activities at the Australian operations.

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John Landmark, Kirkland Lake Gold LTD. - VP of Exploration for Australia [7]

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Thank you, Doug, and good morning, everybody. On the Australian side, investment into internal exploration projects has yielded significant growth opportunities across our mine zones, a title of $14 million was invested to advance growth initiatives for the 12 months ended December 31, 2016 and some 50% of this was attributable to optimal. At the peak of the exploration program during 2016, a total of 15 drill rigs were in operation across our Australian assets.

Turning to Slide 25. An aggressive growth drilling campaign continues at Fosterville with 9 rigs operating on a range of infill resource definition and exploration programs. Exploration results at Fosterville continue to provide positive share price catalysts by delivering record high-grade intercepts, many containing visible gold mineralization. Over the course of last year, a total of 23,000 meters of growth drilling was completed, and this year, we will more than double that at Fosterville.

On this slide, we have a long section projection looking to the width of the Fosterville Mine, where we have approximately 20 kilometers of potential gold bearing structures on the 500 square kilometer property, highlighting the exceptional potential of this premier gold district.

In early November, we announced record-high visible gold mineralization intercepted at the Harrier base, confirming the potential for Harrier to provide a high-grade independent mining front, in addition to the current Lower Phoenix South mining area. Drill results returned the highest gold grade ever recorded in the Harrier systems including 129 grams per tonne over nearly 7 meters. In addition, drilling into the newly discovered west dipping Lower Phoenix Footwall Structure intersected high-grade gold mineralization, including 550 grams per tonne gold over 3.75 meters. Further surface-based drilling programs also continued to confirm the resource expansion potential of the Phoenix system with an intercept of 6.5 grams per tonne gold over 27.8 meters, and this hole is located approximately 350 meters north of the Lower Phoenix mineral reserves.

More detailed resource definition during quarter 4 last year was announced in mid-January, returning exceptional results, including the results Tony had mentioned earlier, the highest ever return from Fosterville mine of 1,429 grams per tonne gold over -- just over 15 meters that was a down-hole length but the estimated true width would be about 5 meters. And included in that was 21,490 grams per tonne over a 60-centimeter intersection. And this was in hole UDH1817.

To date, we've been able to successfully demonstrate that high-grade gold mineralization, extended depth on both the Lower Phoenix Footwall and the Eagle structures ahead of the current mining area and that both of these high-grade structures remain open down plunge.

Switching to the next slide to Slide 26 on the Northern Territory. A targeted near mine gold exploration program has resulted in the discovery of new zones of gold mineralization at Cosmo Mine in 2016. Specifically, advancement in the understanding of the mineralization has resulted in the definition of new exploration targets including the discovery of the Western Sliver, Taipan and Redbelly Lodes and most recently, the discovery of the new Lantern Gold Deposit. This new discovery is parallel to current mining zone, and it's situated less than 100 meters from existing underground infrastructure and had returned significant drill intercepts of 119 grams per tonne over 4.5 meters and 15.3 grams per tonne over 11.1 meters. The discovery of the Lantern Gold Deposit represents significant potential to expand resources and become a near-term mining front under the historical open pit. The deposit remains open to expansion along the strike and down plunge and it will be tested in the next 6 months in an aggressive step-out exploration program, which includes scoping and resource definition and also construction of underground development to access the Lantern Deposit.

I'll now pass it over to Tony for closing remarks and wrap up before we open it up for questions.

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Anthony Paul Makuch, Kirkland Lake Gold LTD. - CEO, President and Executive Director [8]

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Okay, thank you, John and the rest of the presenters, Ryan, Phil, Darren and Doug. As you can see, this is an exciting and valuable company with a lot of new value-creating opportunities. You can also get it from the presentation, we have much to talk about and we hope you've enjoyed listening and we appreciate that you took time to listen to our presentation.

Summarizing now, I'll go to Slide 28. And again, reiterating 2016 was a transformational year for Kirkland Lake Gold as we merged 3 companies to create a new mid-tier gold producer. The resulting newly formed company provides a compelling investment thesis for new and current shareholders and is supported by a strong financial position and an exciting pipeline of growth opportunities and exploration upside in prolific mining camps.

Building on our successes in 2016, during 2017, we expect to continue to deliver on our top goal of creating shareholder value by remaining focused on 4 key value drivers. One is delivering on responsible low-cost predictable and achievable gold production. Secondly, we want to continue to generate strong free cash flow and maintain a strong balance sheet. Three, we wanted to continue to demonstrate growth through exploration success and improved efficiencies and generate the organic growth in other ways. And lastly, we strongly believe that today's dividend initiation announcement will be another key value driver for our shareholders.

So summarizing here, thank you very much for dialing into the fourth quarter and year-end conference call. We're Kirkland Lake Gold, as I said prior to. I would also like to thank our Board of Directors and the shareholders for their support, and we look forward to continued success during the rest of 2017. As usual, myself and Ryan are always available for any additional questions that you may have after the call, and I will now turn the call over to the operator for any questions-and-answers.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from Stuart McDougall with M Partners.

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Stuart McDougall, M Partners Inc., Research Division - Mining Analyst [2]

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Just my question is about the Fosterville and specifically when you think the higher grading reserves might come into play at a more regular basis with the production that seemed to have come into play in December. Is that something we will see coming in maybe back half of 2007 (sic) [ 2017 ] or 2008 (sic) [ 2018 ] ? And then again, around Fosterville, when do you think you might be in a position to consider a mill expansion for taking in the Harrier second mining front? And what might that look like based on what you've seen so far today?

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Anthony Paul Makuch, Kirkland Lake Gold LTD. - CEO, President and Executive Director [3]

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Darren Hall may be able to answer the question there.

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Darren Hall, Kirkland Lake Gold LTD. - COO [4]

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Yes. Thanks, Stuart. Thanks for the question. I guess, first, I will tackle the grade discussion. I mean, as you follow the asset, you've seen an improving grade over time over the last 18 months, 2 years and particularly saw quarter-on-quarter improvements in grade through 2016 culminating in some outstanding grades in Q4. Again, you saw the reserve release that went out today as well with an average grade of 9.8 in situ, right? And again, you could trace that back and you can predict what the future look like. With a couple of years or reserves, you're going to anticipate how that's going to play out from a production perspective. We're at -- we're nearly at the end of Q1, and we look forward to in April updating everyone on our Q1 performance, which I think will also be enlightening.

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Anthony Paul Makuch, Kirkland Lake Gold LTD. - CEO, President and Executive Director [5]

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John, you have any additional color you may want to put on that?

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John Landmark, Kirkland Lake Gold LTD. - VP of Exploration for Australia [6]

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No, I think, Stuart, just to comment, it's worth noting that the grades we're seeing at Harrier are comparable to what we've been seeing across the Phoenix and that's worth just keeping in mind.

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Darren Hall, Kirkland Lake Gold LTD. - COO [7]

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Just sort of closing the loop on the second part of the question, I think, was related to mill capacity. When we look at the mill expansion, I guess, is that there's always that opportunity in the future but our absolute focus right now is fully utilizing the Stawell capacity and realizing the full potential of the asset. And we'll do that by adding another 150,000 tonnes a year plus-plus to the existing circuit. And that will come through improved mining performance, expanding areas and adding mining flexibility and developing into area down-dip, which we're developing into now and we anticipate that supplementing production in the back half of 2017.

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Anthony Paul Makuch, Kirkland Lake Gold LTD. - CEO, President and Executive Director [8]

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And to reiterate that excess capacity, as Darren referred to, is already there in the mill.

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Darren Hall, Kirkland Lake Gold LTD. - COO [9]

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Absolutely, it's a very, very terrific amount of capacity.

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Operator [10]

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Your next question comes from (inaudible) with (inaudible).

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Unidentified Analyst, [11]

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I didn't listen to the entire presentation, I had to take a phone call in between. But you mentioned, I heard, that all your numbers starting 3 months ago are in U.S. dollars as opposed to Canadian or Australian. My question is, when are you going to apply for a listing on the NASDAQ or the New York Stock Exchange, American Stock Exchange? Is that in your plans?

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Anthony Paul Makuch, Kirkland Lake Gold LTD. - CEO, President and Executive Director [12]

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Yes, actually to answer that question, I mean, it's something that we're considering and we're going to look -- we're seriously looking at. But right at this point in time, we can't give you any progress on that because it's one of the things that we want to address and to discuss, but we're not definite yet if that's what we're going to do or we can do.

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Unidentified Analyst, [13]

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If you look at your filing, we see like 90% of it is in Toronto, whereas other companies that are dual listing, it's the other way around, Canadian companies that are listed in both places. So I mean, I believe it would help the stock price as well in getting it in out there.

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Anthony Paul Makuch, Kirkland Lake Gold LTD. - CEO, President and Executive Director [14]

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Yes, I don't disagree with you whatsoever. I think -- I guess, we support what you're saying. We understand that. And we just that -- we're investigating what's required to do that.

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Unidentified Analyst, [15]

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Okay. So you agree with me in theory, but not practice.

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Anthony Paul Makuch, Kirkland Lake Gold LTD. - CEO, President and Executive Director [16]

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I agree with you in theory. Executing the practice, there's a lot of things that happen for us to be able to execute the practice. And let's just say that we're working on it.

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Operator [17]

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(Operator Instructions) Your next question comes from Craig Johnston with Scotiabank.

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Craig Johnston, Scotiabank Global Banking and Markets, Research Division - Analyst [18]

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A couple of questions for me. First one, just following up on Fosterville and the grades. Is it -- am I correct to be thinking that guidance this year uses about 7 grams per tonne?

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Darren Hall, Kirkland Lake Gold LTD. - COO [19]

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Yes, correct, Craig. And what it used was the reserves that we have stated at the time.

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Craig Johnston, Scotiabank Global Banking and Markets, Research Division - Analyst [20]

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Okay. So a fair assumption would be that guidance at Fosterville to be very conservative?

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Darren Hall, Kirkland Lake Gold LTD. - COO [21]

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I would hope so, but again as we transfer the year, we'll be able to provide updates. You've got the reserve updates. We're coming out with Q1 performance here within the next month, and that will allow you to make a more informed call.

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Anthony Paul Makuch, Kirkland Lake Gold LTD. - CEO, President and Executive Director [22]

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And as we said, we expect to give predictable and achievable production targets.

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Craig Johnston, Scotiabank Global Banking and Markets, Research Division - Analyst [23]

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Yes, no, I appreciate that. And with respect to Harrier, you're just saying developing down there now and will be -- that will provide some supplemental or in the second half of the year. Can you give us any sense of how much from Harrier's you plan to mine in 2017?

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Darren Hall, Kirkland Lake Gold LTD. - COO [24]

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It's a work in progress as we go. I mean the focus right now is to develop too. We had anticipated adding that production in 2018, but given the favorable results, we're focusing on bringing that in, it's too early to say at this point, Craig. But we continue to push it as hard as we can as we will also, the up-lunge portion of Lower Phoenix as well. The more flexibility we can build into the site allows us to ensure that we maximize the recovery from the down-plunge Lower Phoenix and also allows us to ensure that we do the best possible job to fully utilize that installed mill capacity.

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Anthony Paul Makuch, Kirkland Lake Gold LTD. - CEO, President and Executive Director [25]

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You got to recognize that in order to do this, I mean, it requires equipment and manpower, reorganization, utilization. It also requires both infrastructure, ventilation systems as such, and so Darren is the guy doing a lot of work on that, trying to get there.

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Craig Johnston, Scotiabank Global Banking and Markets, Research Division - Analyst [26]

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Yes, I know for sure. I totally appreciate that. And then maybe just switching to Macassa. A couple of questions there. One, what drove the big grade jump in Q4? Was it just one high-grade stope? And can we expect that to, say, sneak into Q1 as well? Or should that come off of it?

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Pierre Rocque, Kirkland Lake Gold LTD. - VP of Mining Engineering [27]

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Craig, it's Pierre here. The big increase in grade that we saw at Macassa is typically coming from the SMC stopes. As you know, most of those stopes are grading 20 grams and over. So we will continue to examine how much of that SMC we can bring into plan, but right now, I would say, what we've seen in Q1 is not out of the ordinary.

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Anthony Paul Makuch, Kirkland Lake Gold LTD. - CEO, President and Executive Director [28]

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Q4.

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Pierre Rocque, Kirkland Lake Gold LTD. - VP of Mining Engineering [29]

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Q4, sorry.

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Darren Hall, Kirkland Lake Gold LTD. - COO [30]

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Craig, sorry, just to reiterate, so I mean, if you look at the trend there on the graphs, it was an improving profile over the 3 quarters as well, right? So it wasn't just a 1 month issue. I mean, we've seen improving grades over 2016.

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Anthony Paul Makuch, Kirkland Lake Gold LTD. - CEO, President and Executive Director [31]

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And also, the grade, it's already been -- I think it's already been disclosed within Kirkland Lake Gold previously that as we develop the SMC at depth, the grade somewhat improved, right?

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Craig Johnston, Scotiabank Global Banking and Markets, Research Division - Analyst [32]

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Yes, for sure. Okay, and then maybe just a broader question with respect to plans for the asset. I know that in previous discussions, we've had around infrastructure plans. With the new reserve update, the 2 million ounce number there, resources also looking good, how do you -- how are you guys thinking about plans for extending out a new potential shaft in the SMC? Are you guys close to making a decision there? Or say this year's exploration program designed to kind of better understand where maybe a new shaft could go?

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Anthony Paul Makuch, Kirkland Lake Gold LTD. - CEO, President and Executive Director [33]

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Well, you've got some things good. A lot of what's done we're just updated reserve and resource that we've put out for Macassa, and we're getting our heads around life of mine plans, et cetera. It is -- it's all leading us to what we want to do for the next 20 to 30 or 50 years at Macassa, and so we are working towards that. And -- but before we really get our heads around cost and schedule, et cetera, we are trying to get a feel for what it means and is it -- what are the different alternatives in terms of creating value for the shareholders and maximizing that asset.

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Craig Johnston, Scotiabank Global Banking and Markets, Research Division - Analyst [34]

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Yes, now that makes sense. So is it fair to assume though that on the current reserve life that it would be -- it's economic, and I guess I'm probably answering my own question here, but economic to mine, say, those last portions of the SMC in the reserves with the current infrastructure in place?

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Pierre Rocque, Kirkland Lake Gold LTD. - VP of Mining Engineering [35]

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Short answer, Craig, is yes. The mining plan we have is using the existing infrastructure for all the reserves at SMC.

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Craig Johnston, Scotiabank Global Banking and Markets, Research Division - Analyst [36]

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Okay. Okay, and then maybe one just housekeeping item before I step off here. Just with the change of big acquisition in November, just wondering if you guys had any guidance with respect to depreciation expense for the year just so we can hone in on our EPS estimate.

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Unidentified Company Representative, [37]

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Well, I can say that you should be -- you should be seeing probably around $280 -- to $280 dollar per ounce increase in terms of the depletion.

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Craig Johnston, Scotiabank Global Banking and Markets, Research Division - Analyst [38]

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Sorry, $280 an ounce increase?

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Unidentified Company Representative, [39]

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Yes. Yes.

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Operator [40]

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Your next question comes from John Tumazos with John Tumazos Very Independent Research.

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

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Last year's exploration expense for the various companies was about USD 30 million including a couple of months, October, November of Newmarket before consolidated by other company. If you spend 67% more dollars this year or the midpoint of your $45 million, $55 million, will that generate 67% more for each assays, lines of geophysics or are there fixed items, exploration drifts, manpower budgets, roughly how much more information you think you have at the end of this year when you calculate resources?

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Anthony Paul Makuch, Kirkland Lake Gold LTD. - CEO, President and Executive Director [42]

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John, we had a hard time hearing you. Can you sort of try to repeat the question a bit? Sorry about that, but we couldn't hear you.

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

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How much more information in terms of the number of assays, your meterage will you have in this year compared to last year, with about $50 million versus $30 million spent for exploration?

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Anthony Paul Makuch, Kirkland Lake Gold LTD. - CEO, President and Executive Director [44]

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Well, some of it is -- actually, so it's a good question, John, and a lot of it is related to where we're exploring, whether it's underground or surface drilling. And in terms of gathering information, how many pierce points, et cetera. Definitely, the surface drilling at Macassa is a lot of deep holes, and sometimes you had 6,000 or 8,000 feet before you get an intercept. A lot of what's happening at Fosterville, especially coming into 2017, you're doing a lot more underground drilling. Similarly at Macassa, we'd focused -- we got a 5,300 exploration drive. We're focused on exploration. So that would give you a lot more data, shorter holes and a lot more pierce points into the mineralization that we can use to help us in terms of resources and growing that resource and interpretation. Is that part of what you're trying to getting asked? Or maybe I should...

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John Charles Tumazos, John Tumazos Very Independent Research, LLC - President and CEO [45]

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Sure. I was wondering in my mind if you have 67% more information, would the gross resource addition prior to depletion be 67% bigger?

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Anthony Paul Makuch, Kirkland Lake Gold LTD. - CEO, President and Executive Director [46]

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Well, it would be nice if it was linear, and it could be linear, John, but it could also be exponential. So we -- or logarithmic, we don't quite know what it is. But you've got to recognize that when you're drilling into resource, part of it is drilling into resources and upgrading inferred resources to measure indicated. So some of that could be linear. Some of it is drilling into new areas and coming up with new discoveries. And that could be logarithmic in terms of what it could add for resources, right?

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Darren Hall, Kirkland Lake Gold LTD. - COO [47]

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And it's probably...

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Operator [48]

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Seeing there are no further questions at this time, I'll turn the call back over to the presenters.

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Ryan King, Kirkland Lake Gold LTD. - VP of IR [49]

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Thank you very much to everybody for attending the Q4 and full year earnings call. Again, to reiterate, Tony and myself are available any time for call. Thank you very much, operator.

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Operator [50]

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

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Anthony Paul Makuch, Kirkland Lake Gold LTD. - CEO, President and Executive Director [51]

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Thank you.