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Edited Transcript of SGI.V earnings conference call or presentation 14-Aug-19 2:00pm GMT

Q2 2019 Superior Gold Inc Earnings Call

TORONTO Sep 3, 2019 (Thomson StreetEvents) -- Edited Transcript of Superior Gold Inc earnings conference call or presentation Wednesday, August 14, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Christopher John Bradbrook

Superior Gold Inc. - President, CEO & Director

* Paul B. Olmsted

Superior Gold Inc. - VP of Finance, CFO & Secretary

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Conference Call Participants

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* Bereket A. Berhe

M Partners Inc., Research Division - Analyst

* Craig Philip Stanley

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

* Hanif Merali;Echelon Wealth Partners

* Philip Ker

PI Financial Corp., Research Division - Precious Metals Analyst

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Superior Gold's Second Quarter 2019 Results Conference Call. (Operator Instructions) As a reminder, this conference call is being broadcast live on the Internet and recorded.

I would now like to turn the conference call over to Chris Bradbrook, President and Chief Executive Officer. Please go ahead, Mr. Bradbrook.

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Christopher John Bradbrook, Superior Gold Inc. - President, CEO & Director [2]

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Thank you, and good morning, everyone. Welcome to Superior Gold's quarterly conference call on which we will be discussing our second quarter 2019 results.

Before we get started, as a reminder, I would like to ask everyone to refer to the Slide 2 of our presentation, which is posted on our website, to view our cautionary language regarding forward-looking statements.

Our Chief Financial Officer, Paul Olmsted, is going to start the call by discussing our financial results for the quarter. I will now turn the call over to Paul.

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Paul B. Olmsted, Superior Gold Inc. - VP of Finance, CFO & Secretary [3]

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Thank you, Chris. During the second quarter, we generated revenue of $31.6 million from the sale of 23,937 ounces of gold, a decrease of $2 million compared to the second quarter of 2018 on the sale of 25,797 ounces of gold.

Lower gold revenues resulted from 1,860 fewer ounces being sold, which was partially offset by an increase in the realized gold price to $1,320 per ounce from $1,303 per ounce. The reduction in ounces sold was due to fewer ounces being produced as a result of the lower grade ore milled from the contribution from the Hermes open pit, which was offset in part by an increase in the total tonnes milled for the quarter.

Cost of sales were $32.7 million for the quarter, an increase of $2.2 million compared to the same period in 2018. Cost of sales were higher predominantly due to higher payroll and maintenance costs that more than offset a reduction in mining costs at Hermes following a temporary stoppage. The higher payroll and maintenance costs accounted for approximately 75% of the increase in costs, the result of additional personnel hired in the fourth quarter of 2018 to address underground operational limitations and the company's focus on improving underground fleet performance.

Higher tonnes milled also resulted in increased cyanide and power cost on the processing side.

Finally, the increase was also partly due -- result of the variance in the change in inventories. Compared to the second quarter of last year, general administrative expenses decreased due to lower payroll costs as a result of the finalization of -- in 2019 of accruals for 2018 short-term incentive compensation, in which no short-term incentives were awarded to executives in 2018.

Adjusted net loss for the quarter amounted to $1.9 million or $0.02 per share compared to adjusted net income of $654,000 or $0.01 per share in the same quarter of 2018, resulting primarily from the operating loss of $2.3 million partially offset by an income tax recovery of $405,000.

The company ended the quarter with a strong cash position of $17.3 million and no long-term debt. At the end of the second quarter, the company's current assets totaled $34.9 million and current liabilities amounted to $29.6 million for a net working capital balance of $5.3 million. The majority of the current assets pertain to cash and cash equivalents of $17.3 million and inventories of $15.2 million.

The movement from our working capital balance of $6.7 million at the end of 2018 was mainly the result of capital expenditures in support of the underground mine and the adoption of IFRS 16 leases, which resulted in the recognition of current lease liabilities being recognized for contracts previously classified as operating leases.

With our commitment on improving the underground stope grade at Plutonic underground operations, we expect our ability to generate free cash flow to continue to improve as we also take advantage of the strong Australian dollar gold price environment to build a progressively stronger balance sheet in 2019.

I will now turn the call back to Chris to continue with the rest of the presentation.

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Christopher John Bradbrook, Superior Gold Inc. - President, CEO & Director [4]

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Thank you, Paul. The focus of this quarter continued to be on improving operating and financial performance relative to 2019 and in particular, relative to the fourth quarter of 2018.

Consequently, we are pleased that the measures we put in place continue to have a positive impact on both our operating and financial results. We produced 23,843 ounces (sic) [23,849] ounces of gold, which represents a 16% increase over fourth quarter of 2018 and we sold 23,937 ounces of gold at an average realized gold price of USD 1,320 per ounce representing a 24% increase over ounces sold in the fourth quarter of 2018.

All-in sustaining costs of $1,293 per ounce represents a decrease of 18% compared to the fourth quarter of 2018. Since we acquired the Plutonic Gold Operations in October 2016, we have achieved cumulative production of 239,000 ounces of gold. This is a significant achievement and is a testament to both the company's commitment to the Plutonic Gold Operations and the strength of the mineralized system at the Plutonic Gold Mine.

During the quarter, we achieved the record realized gold price of USD 1,320 per ounce and the Australian gold price continue to reach all-time high. This trend has continued in the third quarter where the Australian gold prices reached all-time high of AUD 2,220 an ounce in August and this is expected, as Paul said, to have a positive impact on our financial results in the coming quarter.

Operational improvements seen in the first quarter continued into the second quarter. And we're pleased to report that our underground stope grade, development grade and mill grade increased by 33%, 10% and 20%, respectively, relative to the fourth quarter of 2018 as a focus on mining towards reserve grade, minimizing dilution and improving equipment availability collectively resulted in a 16% increase in production.

As a result, our all-in sustaining cost decreased by 18% relative to fourth quarter of 2018. It's all about grade. As I've mentioned in the past, grade, particularly the underground stope grade is the key driver of operating and financial performance.

During the quarter, our stope grade averaged 3.36 grams of gold per tonne, which is the highest level we've seen at the underground operations since 2017. However, compared to the previous quarter, all-in sustaining costs increased as we incur the necessary additional spending in order to get ahead on underground development and improve equipment availability.

These additional measures, which are key to ensuring our future success, added approximately USD 120 per ounce to the all-in sustaining cost.

The graphic on Slide 10 -- or is it 9, continues to illustrate that our annual production rate and per unit costs are highly leveraged to stope grade, where each 1 gram per tonne increase in stope grade increases our annual production by more than 15,000 ounces of gold and decreases our all-in sustaining cost by approximately $200 per ounce.

In terms of guidance, while we work on establishing a new Life of Mine Plan of the Plutonic Gold Operations, we are willing to sacrifice short-term results to ensure long-term success. Consequently, production for the full year 2019 will be near the low end of our current guidance with costs sliding to exceed current guidance as we allocate the necessary funds to areas required to ensure long-term profitability. This includes development work required and further requirements in ore body modeling and equipment availability.

We anticipate that we'll be releasing our third quarter 2019 production results in October and new Life of Mine Plan at the Plutonic Gold Operations during the second half of 2019. With that, we conclude the presentation portion of the call.

Operator, you can now open the line for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Phil Ker.

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Philip Ker, PI Financial Corp., Research Division - Precious Metals Analyst [2]

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It's Phil Ker from PI Financial here. Obviously, just addressing the cost during the quarter here and moving forward, is this primarily a function of just maintenance cost or what can we attribute the breakdown of the higher-than-expected cost moving forward here?

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Christopher John Bradbrook, Superior Gold Inc. - President, CEO & Director [3]

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Yes. The maintenance cost is part of it because we had substantial amount of catch-up work to do to get ourselves in a position where we are able to manage the equipment availability to much higher levels. That's still an ongoing effort. I mean at some point, we would have put it all behind us, but we're still willing to put in what we need. It's personnel and we need to make sure we have enough people. We're doing the Life of Mine Plan. So we're making sure we got the ore body understood the best we can. So I think a focus in this quarter will be working on bringing them down. But in the short term, they're going to be elevated again because we have to do what we got to do to ensure long-term success rather than the short-term hit or fix.

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Philip Ker, PI Financial Corp., Research Division - Precious Metals Analyst [4]

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And so this -- the higher amount of personnel and maintenance, we can expect this over 2 quarters, a year or...

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Christopher John Bradbrook, Superior Gold Inc. - President, CEO & Director [5]

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Oh, no, this plan is not a year. I mean really we're positioning ourselves for next year. As we've consistently, I think, guided is, we hope to be able to show you the turnaround where we want it towards the end of the year. So the plan -- that will be the plan. Well, it is the plan.

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Philip Ker, PI Financial Corp., Research Division - Precious Metals Analyst [6]

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Okay. And then just with respect to the sustaining capital, is this for development into new stopes or could you just emphasize...

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Christopher John Bradbrook, Superior Gold Inc. - President, CEO & Director [7]

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Yes, I mean really that is -- yes, that's really ensuring sufficient backup inventory of stopes is available as it develops so that we -- as in any underground mine, you get surprises, good and bad, and if you haven't got the operational flexibility to deal with the bad ones, it hits your operational bottom line and that was one of our problems, we didn't have that inventory and so we've been spending the money to develop it.

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Philip Ker, PI Financial Corp., Research Division - Precious Metals Analyst [8]

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And so how many stopes would be in your cycle now versus how many stopes you foresee being with the excess capital being outlaid?

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Christopher John Bradbrook, Superior Gold Inc. - President, CEO & Director [9]

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Yes. Well, the number of stopes in the cycle won't change. It's really just putting what would be standard for underground. It's like 3 months inventory of developed stopes. So you've always got that in front of you. So the number of stopes in the cycle hasn't really changed. It varies according to the size of them, but we're probably typically looking at something like 30 -- 25, 30 a month.

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Philip Ker, PI Financial Corp., Research Division - Precious Metals Analyst [10]

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Okay. I guess then leading into my question then regarding how do we go about starting to increase the tonnage output coming from underground. If we're not looking to increase the number of stopes in the cycle, what's going to be done about the tonnage?

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Christopher John Bradbrook, Superior Gold Inc. - President, CEO & Director [11]

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Well, I think the first step is operating of the tonnage we have been with the best possible grade. Once we've done that and we're doing that consistently and generate -- maximizing free cash, then you begin to look at the question, will -- can we mine it at a greater rate. But I think it'd be -- you want to kind of turn it around with minimum variables. So if we start trying to increase the production at the same time we're trying to optimize the grade, we may end up trying to shooting ourselves in the foot because we're trying to do too many things at once. So that's the first thing. If we -- because basically, if we get back to what we did in 2017, which is the same underground tonnage rate we're doing now, but at a better grade, we generated substantial free cash. So that's the first job -- is to do that. And as I say, once we're there, then we will look if there is a possibility to increase production rate.

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Philip Ker, PI Financial Corp., Research Division - Precious Metals Analyst [12]

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And based on that comparison to 2017, how does that ratio of tonnes coming from development ore versus stope ore compared from then to now?

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Christopher John Bradbrook, Superior Gold Inc. - President, CEO & Director [13]

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It's about the same. It's about the same.

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Philip Ker, PI Financial Corp., Research Division - Precious Metals Analyst [14]

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Okay. So with the increasing stope grade occurring over the past 2 quarters here, is that something that we can continue to expect or do we expect a near term pullback in the stope grade or is the elevated cut-off grade helping mitigate any pullback in that?

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Christopher John Bradbrook, Superior Gold Inc. - President, CEO & Director [15]

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I think, as I said, the plan would be by the end of the year to see us mining stope grades pushing near a reserve grade. Between now and then, we may have periods where as we get in the mine plan developed for the long term, we might see the occasional drop in stope grade, but overall the trend still is up and I believe I'm correct to say and that the stope grade in July was above the average grade in the second quarter.

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Operator [16]

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Your next question comes from the line of Hanif Merali from Echelon Wealth.

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Hanif Merali;Echelon Wealth Partners, [17]

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Chris, you've probably known about the higher cost for months now. You keep whipping shareholders around and/or new buyers of the stock. Like, when you put out a press release that your grades are moving up, why don't you take that as an opportunity to fore warn people that your costs were also going up, just to address issues. Like I just keep seeing everything whip all the time, whether it was on the way down with a lower production or grades, now on the way up. I mean you should be honest with everyone as you can be all the time.

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Christopher John Bradbrook, Superior Gold Inc. - President, CEO & Director [18]

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Well, Steve (sic) [Hanif], we try to provide as transparent as we can in a timely fashion all the information. So sometimes we don't get the cost -- the fully developed cost until such time we can release it. But I mean we really release this information at the same time, we've always done it on a quarterly basis. So I'm not quite sure of doing on a monthly basis, which generally isn't that helpful. How much more information would you give?

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Hanif Merali;Echelon Wealth Partners, [19]

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But on the one hand, the gold prices are moving up, you look like you're getting your act in order, the stock moves up, people get interested, then they get pissed off because the costs were up at the same time, which you probably knew about, okay. I'm just talking about tracking a normalized level as opposed to whipping people in and out of the stock. I haven't changed my attitude. I still own all my stock, okay, but I just watch the goings on here and I tell you, you're doing a bad job on information releasing.

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Christopher John Bradbrook, Superior Gold Inc. - President, CEO & Director [20]

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Okay. Well, I...

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Hanif Merali;Echelon Wealth Partners, [21]

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I'm sorry for saying that but you got to improve there.

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Christopher John Bradbrook, Superior Gold Inc. - President, CEO & Director [22]

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Okay. We'll take that on Board and duly noted it. So I appreciate that.

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Operator [23]

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(Operator Instructions) Your next question comes from the line of Craig Stanley from Eight Capital.

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Craig Philip Stanley, Eight Capital, Research Division - Principal for Metals and Mining Research [24]

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Chris, you mentioned you're going to have the new Life of Mine Plan as we know coming up in the second half of this year. At that point, will that still include some type of open pit component?

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Christopher John Bradbrook, Superior Gold Inc. - President, CEO & Director [25]

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It probably will. I mean it's really a question of where that level of planning is at the time. We realize that people want to see the Life of Mine Plan for underground. So it's going to be purely a function of the state of the information when we put it out. So if we have the underground ready to go and we're still finishing up the open pit, we'll probably put the pit out afterwards, but again we're currently pulling our information all together.

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Craig Philip Stanley, Eight Capital, Research Division - Principal for Metals and Mining Research [26]

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So should we be modeling now that there will be open pit mining in 2020?

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Christopher John Bradbrook, Superior Gold Inc. - President, CEO & Director [27]

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Well, that still is the plan. I mean the granularity on it we need to provide. So that's how I would guide you to that, that's still our intention.

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

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Okay. And previously, you talked about may be more focusing on Plutonic East. Has that changed at all or just because today's press release mentioned looks like you guys are having a harder look at Hermes and Hermes South?

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Christopher John Bradbrook, Superior Gold Inc. - President, CEO & Director [29]

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No, we look at it all. But I think in terms of open pit source for next year, the best likely sources are Plutonic East and either of the past producing pits that are on the Plutonic Mine site. So that hasn't changed.

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Operator [30]

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Your next question comes from the line of Bereket Berhe from M Partners Incorporated.

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Bereket A. Berhe, M Partners Inc., Research Division - Analyst [31]

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Chris, can you give me an estimate going forward what your cost per unit will be per tonnes milled and -- for underground tonnes?

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Christopher John Bradbrook, Superior Gold Inc. - President, CEO & Director [32]

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The milling cost has been pretty consistent, about AUD 21 a tonne regardless of where it comes from.

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Bereket A. Berhe, M Partners Inc., Research Division - Analyst [33]

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Okay. And can you add mining and administration to that as well, please?

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Christopher John Bradbrook, Superior Gold Inc. - President, CEO & Director [34]

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Yes. Mining underground, that's 70 -- Paul is whispering stuff, maybe it's easier if he just told you.

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Paul B. Olmsted, Superior Gold Inc. - VP of Finance, CFO & Secretary [35]

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Yes. I think the range typically is around $70 to $100, underground, depending on how much development we do in any particular period.

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Christopher John Bradbrook, Superior Gold Inc. - President, CEO & Director [36]

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That's all Australian dollars.

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Paul B. Olmsted, Superior Gold Inc. - VP of Finance, CFO & Secretary [37]

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Yes.

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Bereket A. Berhe, M Partners Inc., Research Division - Analyst [38]

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Okay. And what is the administration estimate as well?

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Paul B. Olmsted, Superior Gold Inc. - VP of Finance, CFO & Secretary [39]

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That's typically in and around the AUD 5 mark.

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Bereket A. Berhe, M Partners Inc., Research Division - Analyst [40]

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Okay. Can you -- 25 for processing you said, right?

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Christopher John Bradbrook, Superior Gold Inc. - President, CEO & Director [41]

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21.

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Bereket A. Berhe, M Partners Inc., Research Division - Analyst [42]

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Sorry, 21. Okay. Perfect. And you expect that to remain stable for the foreseeable future?

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Christopher John Bradbrook, Superior Gold Inc. - President, CEO & Director [43]

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It's like -- I mean those costs -- unit cost have been pretty stable since we took it over. Like I said, that is not really the issue. The issue is ore grade. That's the driver of the cost.

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Operator [44]

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Your next question comes from the line of [Joseph Burrows], a private investor.

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Unidentified Participant, [45]

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In the last little while I have noticed 3 things that have caught my eye, [Goldman] buying a position in the stock, also Northern Star putting a geological officer as a director. The third thing that caught my eye was in the latest presentation, that was in the May presentation 2 yellow highlighted exploration holes at a new place called Heights. Could you explain that one to me, please?

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Christopher John Bradbrook, Superior Gold Inc. - President, CEO & Director [46]

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Well, Heights is a historic area where that was sort of out in the middle of a hole -- isolated hole. And it's an area we're currently reviewing, but it was -- that was one and almost historic hole, which I believe we showed in the technical presentation. I think that's probably what you're referring to, but we haven't released any more information than that on it at this moment, but it's part of our targeting process.

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Unidentified Participant, [47]

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Those 2 yellow highlighted holes, you did those?

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Christopher John Bradbrook, Superior Gold Inc. - President, CEO & Director [48]

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No, those were done by Barrick.

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Unidentified Participant, [49]

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Okay. Have you done any drilling there yourself?

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Christopher John Bradbrook, Superior Gold Inc. - President, CEO & Director [50]

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No, we have not followed those up yet.

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Unidentified Participant, [51]

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Okay. No, they're totally different subject. Is it a unionized workforce?

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Christopher John Bradbrook, Superior Gold Inc. - President, CEO & Director [52]

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No.

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Unidentified Participant, [53]

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What's the turnover rate on your personnel roughly, do you know?

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Christopher John Bradbrook, Superior Gold Inc. - President, CEO & Director [54]

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Actually, I don't know on a percentage, it's actually -- it's in line with what you'd see in the rest of Western Australia. I mean one of the features in Australia you see is that people do tend to move around from operation to operation. If they think they'd get a better deal somewhere else, they may go, but we actually tend to get back a lot of people who leave us. So I don't have a specific number for you, but it's not at a line with the rest of the industry.

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Unidentified Participant, [55]

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Okay. Do you hedge anything at all?

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Christopher John Bradbrook, Superior Gold Inc. - President, CEO & Director [56]

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No.

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Operator [57]

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(Operator Instructions) Mr. Bradbrook, there are no further questions at this time. Please continue.

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Christopher John Bradbrook, Superior Gold Inc. - President, CEO & Director [58]

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Since there are no further questions, I would like to thank everyone for joining us today. We appreciate your honesty and forthright nature of your questions or suggestions, which will be taken on Board. And in summary, we are pleased with the progress that we've made in the first half of the year, with the measures we've put in place have begun to positively impact both our operating and financial results. Focus in the second half of the year will continue to be investing capital in the mining operations to ensure long-term success of Plutonic. Thank you again for joining us on the call today, and have a good day.

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Operator [59]

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Ladies and gentlemen, this concludes the conference call for today. Thank you for participating. Please disconnect your lines.