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Edited Transcript of PG.TO earnings conference call or presentation 7-Aug-19 2:00pm GMT

Half Year 2019 Premier Gold Mines Ltd Earnings Call

Thunder Bay Aug 14, 2019 (Thomson StreetEvents) -- Edited Transcript of Premier Gold Mines Ltd earnings conference call or presentation Wednesday, August 7, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Brent Kristof

Premier Gold Mines Limited - SVP of Operations

* Ewan Stewart Downie

Premier Gold Mines Limited - President, CEO & Director

* John A. Begeman

Premier Gold Mines Limited - Executive Chairman

* Steven J. Filipovic

Premier Gold Mines Limited - CFO

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Conference Call Participants

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* Andrew Rostislav Mikitchook

BMO Capital Markets Equity Research - Analyst

* Bryce Adams

CIBC Capital Markets, Research Division - Analyst

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Presentation

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Operator [1]

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Good morning. My name is Leonie, and I'll be your conference operator today. At this time, I'd like to welcome everyone to Premier Gold Mines Limited Q2 2019 Operating Results, Webcast and Conference Call. (Operator Instructions)

I would now like to turn the call over to your host, Mr. John Begeman, Executive Chairman. Please go ahead.

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John A. Begeman, Premier Gold Mines Limited - Executive Chairman [2]

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Thank you, operator. Thank you for participating in today's call. I am John Begeman, the Executive Chairman of Premier Gold. With me on the call today are Ewan Downie, President and Chief Executive Officer; Steven Filipovic, Chief Financial Officer; Matt Gollat, Vice President, Business Development; and Brent Kristof, our Senior Vice President of Operations. All will be available during the question-and-answer portion of this call.

For those of you that haven't already accessed the presentation, the presentation materials for today's call have been posted and are available on the company's website. But before we get started, I first want to direct you to Page 3 of the presentation and the associated disclaimer regarding forward-looking statements. Ewan and Steve will provide a discussion and summary but first a few points. The company remains strong in a strong position with a healthy balance sheet of USD 26.4 million in cash and cash equivalents. We currently have a strong cash position to drive our projects forward.

In addition, an unused line of credit of $50 million is available to us for our development projects. We expect to use much of this line to invest and build the new South Arturo El Nino underground mine and the recently initiated Phase 1 pit at South Arturo. El Nino progress is ahead of schedule with a [go forward] scheduled well in advance of prior expectations. We will continue to advance the coal with hydrology studies and permitting to further advance what we hope will be a future production decision. We continue to work and optimize our growth pipeline, our 50% owned Greenstone Gold Mines joint venture has had positive response in governmental studies, which now has both been received.

Operational permitting is currently being advanced. Progress with the First Nation also continue. The Greenstone Mine's management team continues to optimize mine plans, work has been done on updating the resource, capital and operational cost updates are next to be listed on the update list. All of these aspects that further optimize the project, along with financing opportunities continue to be a focus for the Greenstone team during the balance of 2019.

Production at Mercedes continues to be more heavily weighted to the second half of the year. Development of additional working cases at Lupita, Rey de Oro and Diluvio continues. The Marianas ramp continues and is providing access for underground drilling of the Marianas zone. We continue to see minable grades and widths in Marianas' exploration. This will be worked into the mine plan to take advantage of the higher grades. Ewan will discuss these and other topics further after Steve's financial presentation.

Turn your attention now to Slide 4, which depicts the geographical locations of Premier's operations. As you can see, we're 100% North American focused in safe world-class jurisdictions. We have a business model that shows growing production with new -- 2 new mine developments and sustained exploration, which will help grow our reserves and resources. We adhere to sensible partnerships. We leverage the expertise and share costs to help diversify risk. As mentioned, we have a strong treasury, $26.4 million in cash, $50 million in undrawn facility and $73 million remaining in earn-in obligations from [Centerra] and Greenstone and also at McCoy-Cove with our other joint venture.

Turning to Slide 5, shows our extensive growth pipeline. We have 5 exploration projects and 2 each in the conceptual feasibility and execution stage as well as one steady-state producer at Mercedes, which is a 100% owned by Premier. As these projects develop through the pipeline, we expect to grow our production opportunities.

Slide 6 demonstrates our reserve and growth over the last 4 years. You can see that we are steady in our growth and replacement of reserves in our [ask]. We expect to continue this trend into the future.

At this time, I'll turn the call over to Steve Filipovic, Chief Financial Officer. After Steve's discussion, Ewan Downie will provide a further operations update, followed by a time for questions.

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Steven J. Filipovic, Premier Gold Mines Limited - CFO [3]

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Thanks, John, and good morning, everyone. Referring to Slide 7. During the second quarter, we produced a total of 16,449 (sic) [16,450] ounces of gold and 51,792 ounces of silver. This is up just slightly from the 16,007 ounces of gold and 51,746 ounces of silver we produced during the second quarter of 2018. Except for just over 900 ounces delivered from our Phase 2 pit in South Arturo in June of this year, our total production so far this year has been entirely from Mercedes. On a year-to-date basis, production from Mercedes is up 17% over the corresponding period last year, while the first quarter production of Mercedes was on plan. Second quarter production did, however, track the lower end of plan due to lower grade mined at Diluvio. As we've noted previously, production profile of Mercedes this year is weighted towards the second half. The Mercedes operation team is focused on making plan for the remainder of the year and it's taken steps, including increased delineation drilling to ensure we do so. Nevertheless, with lower-than-planned production during the second quarter, we are now tracking toward the lower end of Mercedes guidance for 2019.

We do expect, however, that the El Nino mine in South Arturo will begin producing earlier than originally planned. And therefore, we look forward to the positive impact that this will have on our overall production numbers for 2019. From an operating cost perspective, unit operating costs on a co-product basis during the second quarter were cash costs of $1,014 and all-in sustaining cost of $1,228. That compares to consolidated cash cost of $963 and all-in sustaining cost of $1,088 in the prior year. On a year-to-date basis, unit operating costs, were cash cost of $910 and all-in sustaining cost of $1,166, and that compares to consolidated cash cost of $811 and all-in sustaining cost of 1,930 -- sorry $1,934 (sic) [$934] in the prior year. Unit costs this year are related almost entirely with Mercedes where development costs are weighted more heavily towards the first half and production to the second. Unit cost like production during the first quarter were in line with plan.

Development spend during the second quarter was also on track but lower-than-planned production from Mercedes during the second quarter has impacted our reported unit costs, both for the quarter and year-to-date. While we recognize that all-in sustaining cost reported year-to-date, exceed those previously guided for 2019, monthly cost at Mercedes within the plan are projected to fall as we work through the remainder of the 2019 mine plan. That said, and without considering the impact of earlier than planned production for South Arturo will have, we are now projecting that we will land near the upper end of our guiding costs for 2019.

Turning to Slide 8. During the second quarter, the company reported revenue of $23 million on sales of 17,300 ounces of gold at an average realized price of USD 1,283 and 56,400 ounces of silver at an average price of USD 15. This compares to prior year when we reported revenue of $27 million on sales of 20,600 ounces of gold at a realized price of $1,283 and 58,000 ounces of silver at a price of $16, where prior year revenues still included a modest contribution from our South Arturo mine. For the second quarter, we recorded a mine operating loss of just under $0.7 million and a net loss of $10 million or loss per share at $0.05. This is after taking into account $5.4 million in exploration during the period and about $2.4 million in noncash costs. This compared to the prior year, when we reported a mine operating loss of $1.2 million during the same period and a net loss of $7.7 million or loss per share of $0.04.

From a cash flow perspective, during the quarter, we reported over $3 million in cash used in operating activities after taking into account $5 million exploration and $1 million in working capital adjustments. We also reported $12.5 million in capital expenditures during the period. With an overall decrease in cash of $60 million during the quarter, we finished the quarter with $26.4 million in cash, but we finished the quarter with the full balance of our $50 million credit facility undrawn.

At this point, I'd like to turn your attention to Slide 9. And Ewan will start with a discussion around the highlights of our projects.

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Ewan Stewart Downie, Premier Gold Mines Limited - President, CEO & Director [4]

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Thank you, John. Thank you, Steve. Just to bring everybody up to speed on what the company is doing. We do have a very aggressive growth platform, numerous projects in various stages of development on top of our producing operation. One of the highlights we expect this year is South Arturo, where we have the new El Nino high grade underground mine that is expected to begin processing during the current quarter, and that's well in advance of their previous schedule. That property is operated by our partner, Barrick Gold and the new joint venture that is Nevada gold mine. In terms of projects, as John mentioned, we do have several projects in various stages of development, ranging from early exploration to advanced exploration as we see at Greenstone Gold and our hard rock deposits and the McCoy-Cove property in Nevada and mine operations that include Mercedes and South Arturo that is currently ramping up 2 operations.

In terms of what to expect this year. The 2 mines at South Arturo are well under development, both the El Nino underground and the Phase 1 open pit. At McCoy-Cove, we're currently doing hydrology testing in advance of our decision on how to proceed towards feasibility. At Greenstone Gold, there is a significant program underway where we're seeing detailed engineering and permitting in advance of also looking at production decision there likely later this year, early next year. Greenstone Gold and the Hardrock deposit is one of the largest deposits sitting on a highway that is near permitted I think that you'll find in North America. In terms of news this year, we do expect an updated resource, had a lot of success in our exploration or detailed drilling programs that we did over the past 2 years, and we expect to demonstrate how that affects the project here later this year. And at Mercedes in Mexico, we are continuing to advance new development projects, including Marianas, where we are doing underground drilling in advance of hopefully moving that into our production at the project. And we have a very significant exploration drill program going where we recently identified 2.5 kilometer mineralized corridor to the east and west of one of our existing operations, and we'll go through that in a further slide.

Moving on to Slide 10. In terms of our growing production, the production that we've seen from the company, we did see during the quarter, the first processing of some stockpiles from the Phase 2 pit. However, at Arturo the main thrust going forward is the El Nino underground mine and the Phase 1 pit that are currently under construction. And now El Nino is moving to actually mining underground. And we continue the ongoing evaluation of the Phase 3 open pit, which we view as the next production player at South Arturo, and we heap leach material currently as we are stripping the Phase 1 pit. We are going through some potential heat leach materials that is currently being stockpiled in advance of a decision on where we would expect to process that material in the future.

At McCoy-Cove, as I said, we are advancing the permitting. And in terms of Nevada exploration, we have Rye & Rodeo Creek. At Rye, we will be drilling here shortly. And we view that as one of our top exploration projects that will be tested this year.

Slide 11. Introducing the Premier projects in Nevada. Nevada is arguably and likely one of the most productive gold districts, I think you'll find anywhere in the world. The Carlin and Battle Mountain trends are world-renowned for their gold endowment, producing and having reserves and resources in terms of hundreds of millions of ounces. As you can see in the white outline South Arturo, other than the Nevada JV, is the only property on the North Carlin, not owned by the joint venture. And it is in partnership -- or not wholly owned by the joint venture and is in partnership with Nevada Gold Mines there. Rodeo Creek is immediately adjoining South Arturo to the north, and that property is 100% held by Premier. We have an option to acquire 100%. In the Battle Mountain Trend area just south of the Phoenix Fortitude Mine operated by the Nevada joint venture, we have our McCoy-Cove property, approximately 50 square miles of prospective geology with one of the highest grade undeveloped gold deposits in Nevada that at least over 100 million ounces and to the west of McCoy-Cove is the Gold Banks and Rye project. These properties are under option from both Barrick and Kinross and are host to high-grade vein type mineralization that we will be drilling starting in the current quarter.

Slide 12. Just an overview of the South Arturo mine. In this image on the right of the slide, you can see in red, the multiple deposits that make up what I think is being viewed now with the joint venture as the largest gold complex in the world. I believe this year it will be producing in the range of 4 million ounces. Immediately on trend with this major complex is the past producing Dee mine, and that's where our South Arturo property is and in red are the various deposits that we are advancing on that property. As I mentioned, the Phase 1 open pit is under construction. We expect that to be accessing ore next year. The El Nino underground mine has now accessed the ore zone, and we are mining ore, and there is actually some ore being stockpiled as we speak. And we are expecting processing, as John mentioned, in the current quarter, well in advance of the previous schedule. The run-of-mine heap leach material and the Phase 3 open pit are continuing to be advanced to be moved, hopefully into future reserves and then into our mine plan to ensure steady-state production well into the future at Arturo. We continue to see exploration in the area. There is going to be drilling at El Nino underground and then surface drilling to expand the high-grade deposit that we get back up. And we are going to be drilling east Dee targets, where we have some very good intercepts in last year's drill program. Rodeo Creek on this image you can see is immediately adjoining it to the north. In terms of ownership, South Arturo is 60% Nevada (sic) [Barrick] Gold and 40% Premier. The ore from the underground that's being processed at the roaster at gold strength.

In terms of guidance this year, we've announced that we expect to get somewhere between 5,000 and 10,000 ounces of pre-commercial production material. However, that could change based on the pace at which the project has been developed.

On Slide 13, this is a longer-term image of what we expect will occur at South Arturo. The Phase 2 pit on the right has been mined out. And from the bottom of that pit, we have now constructed a ramp to access the high-grade extension of that deposit El Nino, and as I mentioned, ore is now being stockpiled for processing. Phase 1 on the left side of the image is in construction and is host to both higher grade mineralization at depth and also heap leach material that is currently being stockpiled. Phase 3, which looks like it is in between, but actually just to the south of the Phase 2 and Phase 1 operation is both -- contains both higher grade mineralization at depth and potential heap leach mineralization. Decision on the heap leach is likely going to be made later this year or next year on how we expect to proceed. Immediately to the east of the Phase 1 open pit is the high-grade mineralized area that we refer to as East Dee. As you can see, some very broad, high-grade bigger steps from last year's program that are going to be followed up this year in an effort to move the East Dee project into resource and hopefully, in the future, that will be in the next mining center at South Arturo. So the property offers significant upside and it's operated by what should be considered one of the top mining companies in the world Barrick and the Nevada Gold joint venture. And for us, a very exciting project for the future.

Slide 14 is the 2 projects that we have under construction. As you can see, the El Nino property, it is underground. It is a high-grade, approximately 10 gram underground deposit, and it is expected to commence in this guide, we're saying late 2019, which was the original plan. However, we are mining on ore right now. And we do expect processing to begin ahead of the previous schedule. The image on the right is an earlier image of the pre-strip of the Phase 1 pit. This is a significant expansion on the historic Dee pit that you can see in that image. And the main ore zone is expected to be accessed in the second half of 2020. As I mentioned, the heap leach material is being stockpiled for potential future processing options.

Slide 14 (sic) [Slide 15] is an introduction to the other -- the other projects we are advancing in Nevada, the McCoy-Cove property. The property is currently owned 100% by Premier. And in white is the main deposit currently hosts to a resource of approximately 1.6 million ounces in all categories at a grade of over 11 grams per ton. We are currently advancing that deposit on our own and are looking at a potential decision -- a future decision to construct an underground decline in order to complete a detailed drilling in advance of the feasibility study. Currently, we are just starting a hydrological flow test. We drilled 2 large diameter wells in order to properly assess the water in the area prior to going ahead with that decline. The area outside of that white block in blue is currently under option to Barrick, who hold an option to earn up to 60% by funding $22.5 million in exploration.

On the next slide, Slide 16. You can see the plans that we have to advance this project in the future. Obviously, the PEA was released in 2018. A lot of the mineralization there is currently in the inferred category. So we are putting together a plan to complete the detailed drilling required to move the mineralization up to the indicated category in order to complete a feasibility study. The PEA assumptions show 70 -- 740,000 ounces of production at a grade of 10.4 grams per ton or 0.3 ounces per ton. The after-tax 5% discounted net present value of USD 143 million and an after-tax internal rate of return of 50% (sic) [48%]. We believe that the deposit remains open to the southeast in the area where it shows expansion potential. Our target would be to expand mineralization from underground, and hope that the ultimate feasibility study will yield well over 1 million ounces of potential future production.

On Slide 17, I will move to the Mexican operation. In Mexico, we have our Mercedes mine where we're advancing the high potential Marianas deposit, and we have a renewed exploration effort that has already yielded some success this year. At Mercedes since we acquired the project had been transitioning into lower grade deposits, which have hence proved to be -- proven to be somewhat challenging, I'd say, since we went underground and has resulted in us having at times less than what we'd like to see in terms of production -- saw that in the second quarter. However, the ongoing work that we're doing where we have expected all along to see lower costs and more production in the second half of the year, and we remain confident that we will execute on that plan.

Slide 18 shows in the upper right image the Mercedes mine. Mercedes is an underground operation, owned 100% by the company. The plant throughput is 2,000 tons per day and with the work we're doing, we're expecting to be in a better position to continue to feed that processing plant at capacity. Hopefully, that will be realized in the second half. In terms of guidance, we have -- we are suggesting now that we're guiding towards the lower end of the production for this year and the higher end of cost and that's owing to some of the challenges we've had at Diluvio. In the lower image on the left, you can see Diluvio up to the north of the main Mercedes trend. And Diluvio is where the majority of our ore is coming from. Diluvio is a lower grade deposit in our reserves, Lupita is higher grade, and we expect Marianas, [which is on strike] with the main mine trend to be the highest grade deposit.

Moving on to Slide 19. Marianas is where we view a project that will help the mine to stabilize and will offer additional mining faces for the company to access. And the expectation here is for higher grades than our current reserve grade. You can see in the total production to date that has come from Barrancas and Lagunas being 4 and over 5 grams per ton rather than the closer to 3 grams that we see at Diluvio. So this is an important part of the mine for us to advance. We are currently driving the decline. As you can see on the right of the upper image. And we are currently undertaking that underground drill program on the Marianas deposit in advance of moving it into development. We have identified early on at the far right and that will be on the south end of the Marianas deposit, a high-grade area, where we have had very broad intercepts of material grading 4.96 grams gold over 31 meters and 4.5 grams gold over 20 meters, including higher grade mineralization. That area has been subject to additional drilling, and we expect that, that lens will be mined starting either later this year or early next year.

Slide 20. One of the big exploration successes we're having in the current program is Lupita. You can see there's location of Lupita is adjoining Diluvio. And in fact, the ramp that accesses Diluvio accesses Lupita on the way down. And in this image Lupita is shown as a smaller mineralized area as compared to Diluvio. Lupita is also about a gram higher grade than Diluvio. And on the 2 images on the right, pre 2019, there was some drilling here. And the -- even though it was wide space and very few holes. It was interpreted that the mineralized potential of this area was somewhat limited, and you can see the 2 black circles that represent holes that were drilled prior to this year's program. This year's program targeted the yellow south, which was modeled as a low-grade portion. And when we drilled there, we actually get high-grade mineralization. And that mineralization is now being drilled for several hundred meters now to be left to the San Martin area. And you can see the difference between the mineral potential that we have seen in pre 2019 and what we see today. We are now infill drilling and continuing to step out in the San Martin and Lupita area in order to move this project into our resources and reserves and then for future mining. The grades in our drilling do appear to be similar to Lupita and as I mentioned, Lupita -- the mineralization that we mine at Lupita is significantly higher than at the Diluvio. So very exciting exploration success for the site. And congratulate our exploration team at Marinas or at Mercedes for their efforts here and making sure that we continue to replace reserves on an annual basis. The entire corridor over to Margarita, where we've also been [introspecting] the mineralization is approximately 2.5 kilometers of potential. So it is being one of our main drill areas in this year's drill program.

Moving on to our major development opportunities in the company, our largest deposit in the company's portfolio is the Hardrock deposit, part of our Greenstone joint venture with our partner Centerra that is currently being advanced to a production decision later this year, early next year. The property has now received both federal and provincial approval. Major milestones in the advancement of this property and impact benefit agreement has been signed with 2 of the primary groups that we are dealing with in that area, and we are progressing discussions with the remaining First Nation communities that are working as one group. We also have 2 advance land -- or 2 key land positions in Red Lake. These properties being Hasaga and the Rahill-Bonanza JV with Newmont Goldcorp.

The Greenstone property on Slide 22 is the company's largest deposit and assuming we do make a construction decision to go ahead with the construction of this mine, it will be our company's largest operation. The plan here is to complete a 27,000 ton per day plant, the primary mine being 14.5 year mine life based on our feasibility study from open pitting mining only. Centerra continues to sole fund this project with approximately $58 million remaining at March 31, and the permitting, we will update that for the current quarter. The benefit of doing this are being negotiated with the local communities and the nearby Brookbank and Key Lake deposits offer further upside.

On Slide 23, is the deposits shown in a 3D image of what we have drilled. As you can see, the open pit is host on the previous slide to approximately 4.65 million ounces sitting right on the highway in Canada. The open pit though is not the full extent of the deposit, it does continue at depth. There is over 4 million ounces that are approximately 4.5 million ounces of underground resource. It was not calculated or considered in the feasibility study and offers very significant upside for this project. The last -- or the westernmost hole that we drilled when we were drilling off the deposit intersected 20.5 meters of 18.5 grams, and the deposit remained open and plunged. So the upside for this project is very significant. We have completed almost 40,000 meters of RC and core drilling on the deposit since the feasibility study was completed, and we are expecting an updated resource to be released sometime in the second half of this year.

Slide 24, looking at our -- what we hope will be our mines in the future. We -- Premier definitely believes for our long-term success and longevity, that is prerequisite to maintain a very solid exploration portfolio so that we can continue to develop projects that could be mined that will replace our current mines in the future. Our 2 primary properties that we view as being -- having the potential to do that for us. Our Hasaga in Red Lake. Hasaga is host to a plus 1 million ounce near surface, bulk sort of open pit type resource. And we have been delineating an underground deposit called the C-Zone down plunge of the past producing Howey/Hasaga gold mines that produced up until 1952. The final step-out hole of last year's program was at 23.4 meter true width of 6 -- or 5.69 gram material. And that was contained within an intersect of 67 meters at 4 grams. So definitely, we believe that we are -- have been drilling off a very significant more bulk tonnage type underground deposit in the Red Lake camp. And in the future, we look forward to continuing to advance that project forward. This year in terms of exploration, as I mentioned earlier in this presentation, our primary target of this year's exploration will be the Rye property that we hold an option to acquire from Barrick, where previous drilling has identified a high-grade mineralized areas with area that multiple intercepts of plus 10 to have -- 10 grams per ton, up to over 100 grams per ton that we will be following up and hoping to expand on. It is one of the most extensive outcropping at the thermal vein systems we have seen in Nevada and has both open pit and underground potential. Drilling at Rye is targeted to begin here very shortly.

So as a summary, on Slide 25. Premier is the company that is growing our future production with 2 mine developments underway at South Arturo and 2 projects being permitted for future development. We continue to grow our reserves and resources. We've been very successful. Since 2015, we have more than doubled our gold endowment contained by the company. So very successful in exploration efforts on our property. And we continue to see a sustained exploration effort across the company's portfolio. And with the new developments coming online, we expect to deliver long-term cash flow. And that cash flow should increase with the continued development of our high-grade projects that we have in Canada and the United States.

With that, I will open up the floor for questions. A question-and-answer period, and we have several other people from the company online, who can assist in answering those.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question is from Bryce Adams from CIBC.

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Bryce Adams, CIBC Capital Markets, Research Division - Analyst [2]

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You mentioned a potential construction decision at Hardrock. I was wondering if you had an estimated timeline towards that construction decision.

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Ewan Stewart Downie, Premier Gold Mines Limited - President, CEO & Director [3]

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We have completed the drill program on essentially production scale drilling on the first 5 years of production -- expected production. We have been very proactive in assuring that we have good community relations. This year, in terms of annual expenditures is the biggest spend since Centerra joined us as a partner. And we are expecting and just completing the new resource for the properties that will then be implemented into the final mine plan and with that, we'll be able to update the economics and we expect everything that's being done will be positive to the project economics and resource. And earlier this year, we published that the drill program is suggesting a fairly significantly higher grade than what was in the feasibility study. And with that work, we expect that at year-end or early in the new year, we will sit down as a partnership and make a decision as to if and when we choose to go ahead with construction. Best-case scenario, I'd say would be starting construction next summer. We thought that decision will be made once we get towards year-end. And our teams are working with Greenstone in financing packages that would ensure that this project goes ahead. So everything is being done to move it to that decision, but a decision won't be made until at least year-end.

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Bryce Adams, CIBC Capital Markets, Research Division - Analyst [4]

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Okay. So all told, next summer 2020 is one scenario that looks probable.

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Ewan Stewart Downie, Premier Gold Mines Limited - President, CEO & Director [5]

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Well, the gold price is certainly helping. This is a Canadian project sits on the highway. There is a community right there it's, I'd say, it shares a lot of similarities to the Canadian electric project that is operated by Yamana and Agnico. So yes, and gold, I think, today, just broke 2,000 Canadian. And I think that's the first time in history. So this is a very significant project. It's definitely very leveraged to the Canadian gold price. And I think it's almost been a forgotten project within our portfolio. Yet, I'd ask you how many $10 million deposit on near $10 million deposit sitting on the highway are almost ready for development in North America.

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Bryce Adams, CIBC Capital Markets, Research Division - Analyst [6]

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Are you asking me? I'm thinking of one. A good situation to be in. Just jumping over to South Arturo. One thing we've been looking forward to is the 3-year outlook. I know there's a few moving parts with the JV there, but is there an update on the 3-year outlook that would provide some clarity over the next couple of years?

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Ewan Stewart Downie, Premier Gold Mines Limited - President, CEO & Director [7]

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It's still a work in progress. Sorry, Bryce, I know we've said that before. I think we're on our way to seeing a good 3-year progress plan earlier in the year. But as you know, Eric and Newmont entered into an agreement to create Nevada Gold Mine. And with that, now there are -- what I view as a positive for our project, there are a lot more processing options available to the joint venture and to South Arturo with this. So plans are likely changing on what's going to happen. As you know, our heap leach material right now, our plan would be to construct and we are permitted to build heap leach facility on site. However, with the joint venture, there's now a heap leach pad in the vicinity. So it's -- I guess it's possible that some material could make that, but none is being made. So there's a lot of work being done by Barrick. I'm sure it's a pretty major undertaking for them to figure everything out, and we are part of that. So we hope that in the second half this year, we will get a much better plan that we can actually provide you with that better guidance.

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Bryce Adams, CIBC Capital Markets, Research Division - Analyst [8]

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You mentioned the underground is progressing ahead of plan, and Phase 1 is on track for the second half of 2020. Would you say it's tracking more towards mid-year 2020 or more towards Q4?

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Ewan Stewart Downie, Premier Gold Mines Limited - President, CEO & Director [9]

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I would say more towards Q4. But again, that could always change as well. Right now, the heap leach material best-case scenario that we have been guiding a sort of '21, '22. So there's possibility that could be moved forward. There's a lot of probably juggling going on where material is going to go. But yes, I'd say, for now, we'll continue to be conservative. So I'd say, late 2020, but as we were saying earlier, we are expecting El Nino to be late 2019 and here we are in Q3, and we're now mining ore. So now it's just a matter of deciding when we'll see the first processing. And I'm sure we'll be pretty proud to promote that thing.

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Bryce Adams, CIBC Capital Markets, Research Division - Analyst [10]

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Right. So moving on to Mercedes and trying to back into 2019 guidance, you have maintained guidance, but talking towards the lower end of guidance. If we use 2,000 tons a day and hold recoveries around 96%, that would infer you need the grade profile to be 3.7 grams per ton to get to the lower end of guidance? Is that the right way to be thinking about it? And is that your expectation for grades over the next 2 quarters?

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Ewan Stewart Downie, Premier Gold Mines Limited - President, CEO & Director [11]

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I don't think it's necessarily all grade. The mill will take more than 2,000 tons a day. So not only will we need to be mining on the higher grade portions of the deposit, we will also need to be increasing throughput. So I'd say, for us to make that low end of guidance is we are really pushing for that would be the best way to plan it. But if we can hit budget for the balance of this year, we'll have a good shot at making the low end of guidance.

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Bryce Adams, CIBC Capital Markets, Research Division - Analyst [12]

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So could go over 2,000 tons a day?

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Ewan Stewart Downie, Premier Gold Mines Limited - President, CEO & Director [13]

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Yes, I think the mills run at over [24]. We don't want to push it too hard or put in too much low-grade material, so we have to be careful. But the Diluvio deposit that we've discussed frequently has been a challenge. And this year, it's making up more than 50% of our ore. And it continues to be a bit of a challenge. We also driving the ramp to Marianas encountered ground conditions that were -- we are following the fault structure being more difficult than we were hoping. And in order for safety purposes, they're not pushing it too hard. We want to maintain a very safe operation. And we did expect to be drilling off reserves and maybe even getting into Marianas this year when we first bought the operation. And now we're not expecting to be mining at Marianas until next year.

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Bryce Adams, CIBC Capital Markets, Research Division - Analyst [14]

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Okay. Last one for me. There was a comment in MD&A about a change in the mining methods in Q2. Just wondering if you could touch on that and add a little more color to it, please?

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John A. Begeman, Premier Gold Mines Limited - Executive Chairman [15]

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At Mercedes, right?

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Bryce Adams, CIBC Capital Markets, Research Division - Analyst [16]

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Yes, at Mercedes.

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John A. Begeman, Premier Gold Mines Limited - Executive Chairman [17]

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Okay. Yes, I mean, I suspect that this is regarding the Diluvio area, where there are certain areas that we were going to go in and use cut and fill. But actually, we were able to use some long-haul stoping instead. So it's a combination rather than one. And Brent can offer any other assistance on that one if that's not correct.

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Brent Kristof, Premier Gold Mines Limited - SVP of Operations [18]

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No, there's nothing to add to that, John. Basically, we've been back and forth, but with the new model of Diluvio, we've embraced, we've been focusing on long-haul methods because it seems to be more amenable to that.

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Bryce Adams, CIBC Capital Markets, Research Division - Analyst [19]

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Okay. So Diluvio has had its issues, but the change in mining methods would be a net benefit?

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Brent Kristof, Premier Gold Mines Limited - SVP of Operations [20]

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Yes, because of that, it's more productive, obviously, and with the lower grades, it's beneficial.

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Operator [21]

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Your next question is from Andrew Mikitchook from BMO Capital Markets.

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Andrew Rostislav Mikitchook, BMO Capital Markets Equity Research - Analyst [22]

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Just a quick follow-up question at Mercedes. This improvement in tons and grade that was previously discussed. Are you seeing the correct trend so far with the first month of the second half already behind you?

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John A. Begeman, Premier Gold Mines Limited - Executive Chairman [23]

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I would say that Diluvio is still a challenge in the first month of the second half. But particularly of late, we've been seeing a lot of improvements in terms of throughput and ounces per day. So we remain somewhat not aggressively optimistic, but we're -- the mine is expected and always has been expected to perform better in the second half of the year.

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Andrew Rostislav Mikitchook, BMO Capital Markets Equity Research - Analyst [24]

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Okay. And then just looking out beyond say 6 months. Do you think there's been -- you guys are working towards the situation where you have more of a stable production profile as opposed to a back-end loaded year in the last 2 years here?

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John A. Begeman, Premier Gold Mines Limited - Executive Chairman [25]

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Yes. As I said, we do expect to get into some potential ore at Marianas. The best-case scenario being late this year, and we're now drilling off the main portion. We're getting there, we can drill off the main portion of Marianas and bringing Marianas into the mine plan will provide additional working faces for us to mine, which will provide added flexibility in terms of getting our production per day. And the grade is expected to be higher than what we're mining it on almost any area right now. And also, the success we're having right now is expanding Lupita. And Lupita's grade is over 4 grams per ton. And is a higher grade area for us as well and the expansion drilling suggesting pretty significant expansion there. So we recently increased our budget slightly in drilling mainly to complete additional delineation drilling in order to get deposits like the Lupita extension into our future mine plan. And if we develop that area and it holds together as well as it has so far, it will then provide even more areas for us to access higher grade in ore and provide even more working faces. So those 2 opportunities we think will truly help to stabilize this operation in -- especially beginning next year.

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Operator [26]

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There are no further questions at this time. Please proceed.

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John A. Begeman, Premier Gold Mines Limited - Executive Chairman [27]

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Okay. Well, thank you, everybody, for attending. As you know, we're quite open for calls. So please call any of us on Slide 26, it lists the phone numbers where you can access to various people and Steve McGibbon is also available to talk exploration and corporate development, if anybody is interested. Again, thank you for attending our second quarter call. We're really looking forward to the third quarter call, given we're expecting there could be some added influence from the South Arturo operation. Thanks again.

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Operator [28]

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Ladies and gentlemen, this concludes your conference call today. We thank you for participating and ask that you please disconnect your lines.