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Edited Transcript of SMF.TO earnings conference call or presentation 5-Nov-19 3:00pm GMT

Q3 2019 Semafo Inc Earnings Call

Saint-Laurent Nov 9, 2019 (Thomson StreetEvents) -- Edited Transcript of Semafo Inc earnings conference call or presentation Tuesday, November 5, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Benoit Desormeaux

SEMAFO Inc. - President, CEO & Director

* John W. Jentz

SEMAFO Inc. - VP of Corporate Development & IR

* Richard Roy

SEMAFO Inc. - VP of Exploration

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Conference Call Participants

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* Bryce Adams

CIBC Capital Markets, Research Division - Analyst

* Lawson Winder

BofA Merrill Lynch, Research Division - VP & Research Analyst

* Ovais Habib

Scotiabank Global Banking and Markets, Research Division - Research Analyst, Mining

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Presentation

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Operator [1]

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Good morning. My name is Sylvie, and I will be your conference operator today. At this time, I would like to welcome everyone to SEMAFO's Q3 2019 Results Conference Call. (Operator Instructions) Mr. John Jentz, you may now begin the conference.

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John W. Jentz, SEMAFO Inc. - VP of Corporate Development & IR [2]

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Thank you, Sylvie. Good morning. Members of SEMAFO's senior management team joining me today for the call are Benoit Desormeaux, President and Chief Executive Officer; Martin Milette, Chief Financial Officer; Richard Roy, Vice President Exploration; Sylvain Duchesne, Vice President, Engineering and Construction; and Patrick Moryoussef, Vice President Mining Operations.

I'd like to remind listeners that some of the matters to be discussed during today's call may contain forward-looking statements. Forward-looking statements include, but are not limited to, items such as our expectations regarding the market price of gold, timetables, mining operation expenses, capital expenditures, guidance and reserves and resource estimates. Such statements are given as of the date of this conference call and involve risks and uncertainties. A number of factors and assumptions were made in preparing such statements, and actual results could differ materially. Accordingly, you should not place undue reliance on forward-looking statements.

For additional information with respect to forward-looking statements, risks and assumptions, please consult our 2018 annual MD&A as updated and other filings made with the Canadian securities regulatory authorities and available on our website at semafo.com.

SEMAFO disclaims any obligation to update or revise any forward-looking statements, except as required by law. I make this cautionary statement on behalf of all SEMAFO's spokespeople who may address you during this call today. All dollar amounts refer to U.S. dollars unless otherwise stated.

With that said, I will now turn the call over to Benoit Desormeaux for the presentation portion of the call, followed by Q&A. Benoit?

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Benoit Desormeaux, SEMAFO Inc. - President, CEO & Director [3]

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Thank you, John, and good morning, everyone. Thank you for joining SEMAFO's Third Quarter 2019 Results Conference Call. We delivered some excellent results in the quarter that were unfortunately overshadowed somewhat by the Wona pit wall failure. I'm happy to report that the processing plant has restarted, and we are adding to the Mana stockpile with high-grade ore from the Siou open pit. As was always contemplated, we will be processing the Siou open pit high-grade ore in the fourth quarter, which will have a significant positive impact on cost and recoveries, allowing us to meet the full year guidance at Mana. In addition, at Siou, the underground development continues on time and on budget during the quarter. We continue to expect reaching full production at 2,000 tonnes per day in the first quarter of 2020.

Boungou delivered another quarter of strong operational and financial results, contributing more than 55,000 ounces at an all-in sustaining cost of $497 per ounce. Combined with Mana, we had a quarterly production of almost 70,000 ounces at an all-in sustaining cost of $706 per ounce.

Consolidated operating cash flow was a respectable $50 million or $0.15 per share. We recorded a net income of $9 million and earnings of $0.03 per share after a noncash deferred tax expense of $11 million for the Boungou Mine. Excluding the deferred tax expense, our earnings per share would have been $0.06 per share for the period.

The third quarter's continued momentum in exploration and development. At Bantou Nord, we received additional wide intercept at above-average grade, confirming the disseminated nature of the Bantou Nord mineralization. Bantou Proximal also saw additional results in the third quarter, returning consistently higher grade over good widths. Further, we received 2 interesting drill results in the newer area, 700 meters east of the main Bantou Zone. The 2 intercepts of 5 and 6 meter each, both at above 6 grams per tonne and will be followed up in the fourth quarter.

The team is busy working away on a combined resource statement for the consolidated Bantou area, including the Karankasso portion for the year-end resource statement. We anticipate this 2019 combined Bantou resource will be well received, and our 2020 Bantou resource goal of 2.5 million to 3 million ounces continues to be well within reach.

Exploration at our existing operations continue to progress. At Boungou, we have 3 rigs currently drilling. Some of the program was completed in the third quarter, although assays remain outstanding. The remainder of the program will continue in the fourth quarter, exploring near-surface splays just north of the existing pits. At Mana, we received some interesting results from an area we call Fofina Sud, drilling covered a strike length of 250 meters and each section we drilled the return mineralization. The zone remains open long strike, enough depth and follow-up drilling of these areas will be done in the fourth quarter.

Development continues to progress well in the third quarter. We released a PEA on the Nabanga, showing an after-tax NPV of $100 million. Opportunities exist to improve the economics through increased resource and additional cost savings in the mining operation and development.

Finally, I'm pleased to report that we made a $2 million investment in Compass Gold. Compass properties are in Mali, and we believe them to be highly prospective. This investment is consistent with our existing strategy of creating a sustainable development pipeline in addition to extending mine life of our existing operations.

Operator, I would like to open up the lines for Q&A session.

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Questions and Answers

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Operator [1]

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Operator Instructions) And your first question will be from Ovais Habib at Scotiabank.

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Ovais Habib, Scotiabank Global Banking and Markets, Research Division - Research Analyst, Mining [2]

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Just a couple of questions for me. Just in terms of Siou, high-grade coming in Q4, what kind of grades are you expecting, Benoit, coming in Q4? And what's the current stockpile looking like?

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Benoit Desormeaux, SEMAFO Inc. - President, CEO & Director [3]

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In terms of grade, what we're expecting in the quarter is 3.9 grams, about 3.9, and we're expecting to be able to process 350,000 tonne, [1,000] tonne, yes.

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Ovais Habib, Scotiabank Global Banking and Markets, Research Division - Research Analyst, Mining [4]

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Okay. Perfect. And just in terms just moving to Boungou, obviously, grade seems to be hung in pretty nicely above that 6 grams per tonne. And in terms of going into Q4, should we expect similar grades? Or is that still kind of tapering down closer to that 6 grams per tonne for Q4?

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Benoit Desormeaux, SEMAFO Inc. - President, CEO & Director [5]

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Yes. You should expect a bit lower grade. We're expecting the throughput to be higher as well. So since higher throughput will probably not have enough of that kind of 6 grams, so yes, you should expect something more like in the 5.5 gram per tonne or in that vicinity.

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Ovais Habib, Scotiabank Global Banking and Markets, Research Division - Research Analyst, Mining [6]

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Got it. And in terms of the issues that you guys had passed in the past regarding the vertimills and all that, I mean, is that past? And going forward, should we see stable throughput going forward?

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Benoit Desormeaux, SEMAFO Inc. - President, CEO & Director [7]

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Yes, we had like an unplanned shutdown during the third quarter related to the magnetic liners. This is solved now. So it's operating well since we started back at the beginning of September. As well in the beginning of the fourth quarter, beginning of October, we have changed the liners in the SAG mill. That's been a challenge. Since the beginning of the operation, there was some jamming between lifters. We had to change the liners and those new Metso design have been installed in beginning October, and I can tell you that the jamming between lifters has been solved.

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Ovais Habib, Scotiabank Global Banking and Markets, Research Division - Research Analyst, Mining [8]

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Perfect. Okay. And then just switching gears to exploration. Obviously, lots of targets that you guys have been releasing some good results from in terms of Bantou. Is there any specific target that Richard is kind of focused on right now or looking to expand?

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Unidentified Company Representative, [9]

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Actually, what we're doing right now is we are compiling the results of the previous drilling and getting ready for resource calculation. But meanwhile, what we're doing is exploring some more grassroots targets all over both the Karankasso and Bantou, and that's what we're going to be focusing on for the Q4.

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Operator [10]

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Next question will be from Bryce Adams at CIBC.

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Bryce Adams, CIBC Capital Markets, Research Division - Analyst [11]

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Just kind of follow-on from Ovais where he left off on Boungou, those throughputs averaged around 3,100 tonnes a day. I was wondering if you could talk to the outlook for throughput at the Boungou going into next year.

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Benoit Desormeaux, SEMAFO Inc. - President, CEO & Director [12]

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Next year. So it's a bit early to talk about next year. We are in the budget process. But what we're expecting in Q4 is to reach the average of the 4,000 tonnes per day, the highest throughput for the year in terms of quarter. So I cannot see why it would be lower next year. Can we reach a bit more? That's still to be confirmed. But again, I'm pretty sure you can at least expect 4,000 tonnes per day.

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Bryce Adams, CIBC Capital Markets, Research Division - Analyst [13]

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Okay. And just to be sure that 4,000 tonnes a day is for an operating day on a calendar day on your availability falls at around 3,700.

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Benoit Desormeaux, SEMAFO Inc. - President, CEO & Director [14]

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That's possible. I think it's more like in -- we're usually using 92% availability. So on 4,000, yes that's about that, yes.

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Bryce Adams, CIBC Capital Markets, Research Division - Analyst [15]

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Okay. So from Q4 onwards, we should be at nameplate?

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Benoit Desormeaux, SEMAFO Inc. - President, CEO & Director [16]

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Yes.

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Bryce Adams, CIBC Capital Markets, Research Division - Analyst [17]

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The 6.25 grams per tonne in Q3. A quick question on that number, how did that reconcile to your block model?

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Benoit Desormeaux, SEMAFO Inc. - President, CEO & Director [18]

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I think these results are consistent. We pretty much have the same since the beginning of the year. Reconciliation is confirming the model.

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

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It's been -- I think, year-to-date, it was slightly positive, 1% or 2% range, is that what you think?

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Benoit Desormeaux, SEMAFO Inc. - President, CEO & Director [20]

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Yes. As a matter of fact, it still remains positive. Tonnage is a bit higher and grade is also a bit higher, or above 3%. So we're still seeing the same tendency in Q3 as we saw in the first 6 months of the year.

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Bryce Adams, CIBC Capital Markets, Research Division - Analyst [21]

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It's a good problem to have. One quick question on the Siou underground. As of end of September, you've already opened up 4 of the 8 levels. Given that -- and that you're accelerating the plan for 2020 into the Q4 period, what are your expectations for development or in Q4 from the Siou underground? And would you put that through the process plan in Q4?

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Benoit Desormeaux, SEMAFO Inc. - President, CEO & Director [22]

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So we expect to complete by the end of December close to 8,100 meters of development, which includes the 5,600 meters of development required to obtain the first production level. In that, there's 2,500 meters of additional. Most of it is associated to stope preparation that we're taking a bit of advance as well and preparing the second mining phase. Right now, the bottleneck in the fourth quarter is completing the vertical raises to permit translation circuit and as well as security issues with the escape point. We hope to attain the first production stope mid-December, and we'll be ramping that production with the 8 mining phases of 4 stopes within Q1 to attain full ramp-up production at 2,000 tonnes per day within Q1 2020.

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Bryce Adams, CIBC Capital Markets, Research Division - Analyst [23]

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Okay. So around 2.5 kilometers of ore development will be completed by year-end. I hear that properly?

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Benoit Desormeaux, SEMAFO Inc. - President, CEO & Director [24]

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Yes, we're averaging about 20 meters per day. We will be completing -- at the end of October, we're at 6,400. We will be doing about 2,000 kilometers total by the end of the year.

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Bryce Adams, CIBC Capital Markets, Research Division - Analyst [25]

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And that development ore would be -- would (inaudible) to the plan?

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Benoit Desormeaux, SEMAFO Inc. - President, CEO & Director [26]

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Yes, but it's not all development ore. A lot of it is additional development to prepare the second mining phase. Some of it is a stope preparation as well. And there is a portion of that, which the 400 meters will be the development ore required.

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Bryce Adams, CIBC Capital Markets, Research Division - Analyst [27]

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Okay. So we'll see something in Q4, but not significant?

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Benoit Desormeaux, SEMAFO Inc. - President, CEO & Director [28]

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Not much. Not significant.

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Richard Roy, SEMAFO Inc. - VP of Exploration [29]

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We did put nothing in our budget or in our forecast in terms of processing.

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Bryce Adams, CIBC Capital Markets, Research Division - Analyst [30]

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Okay. And maybe one more on that, actually. There is a bullet here that says construction of the contract is surface infrastructure was completed. Is that -- what does that relate to? Is that a workshop?

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Benoit Desormeaux, SEMAFO Inc. - President, CEO & Director [31]

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Basically, all infrastructure, we had some temporary infrastructure to quickly commence work on the underground. So we went ahead with an administration building, maintenance workshop, a drive for the workers. We also have gensets, ventilation in raises. So basically, all the permanent infrastructure needed to reach full production has been pretty much are completed.

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Operator [32]

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(Operator Instructions) And your next question will be from Lawson Winder at Bank of America.

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Lawson Winder, BofA Merrill Lynch, Research Division - VP & Research Analyst [33]

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Maybe just a couple of questions on the -- on Boungou again, but this time on costs, what were your mining costs and processing costs in the quarter?

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Benoit Desormeaux, SEMAFO Inc. - President, CEO & Director [34]

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So at Boungou, the mining cost per tonne is $2.35 per tonne of rock. The plant itself $32 a tonne. And we have on-site G&A of $8 per tonne.

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Lawson Winder, BofA Merrill Lynch, Research Division - VP & Research Analyst [35]

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Great. Now that $32 per tonne, I mean, if I remember correctly, I think that's a little bit above your budget. Or are you guys budgeting something in like $27 to $29 range?

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Benoit Desormeaux, SEMAFO Inc. - President, CEO & Director [36]

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Give us a minute.

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Unidentified Company Representative, [37]

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$28.

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Benoit Desormeaux, SEMAFO Inc. - President, CEO & Director [38]

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$28.

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Unidentified Company Representative, [39]

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That's for the full year.

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Unidentified Company Representative, [40]

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But it's a tonne relationship.

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Unidentified Company Representative, [41]

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Yes. So depending -- if we have more tonnes like what we're expecting in the fourth quarter, everything that is fixed on a per tonne basis, of course, is decreasing.

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Benoit Desormeaux, SEMAFO Inc. - President, CEO & Director [42]

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Exactly.

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Lawson Winder, BofA Merrill Lynch, Research Division - VP & Research Analyst [43]

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Yes. No, of course. And then just in terms of rock hardness in Q4. I mean, so far this year, you've been mining from the west side of the pit, which, I mean, obviously, is much harder. Or do you expect to continue mining from the west side of the Boungou pit in Q4? Or can we see some softer ore start to come in?

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Benoit Desormeaux, SEMAFO Inc. - President, CEO & Director [44]

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Yes. As the plan is for the rest of this year and next year as well, we will continue focusing mining within the west pit of the Boungou deposit. We have different sectors in the west pit. Right now, we're in sectors 1 and 5, which is a bit more in the south, but it's very similar in terms of the characteristics of the hardness.

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Unidentified Company Representative, [45]

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Yes. West is maybe a bit harder, but it's not like the east is way softer. It's very close. We have no upside, no saprolite, it's [all] red and black.

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Lawson Winder, BofA Merrill Lynch, Research Division - VP & Research Analyst [46]

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Yes. Okay. That's very helpful. And then just on the throughput levels. Have you guys hit the nameplate capacity yet to date in Q4?

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Benoit Desormeaux, SEMAFO Inc. - President, CEO & Director [47]

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Yes, I would not say it's all depending on the availability. But I would say most of these we are on the target. But we reached the target before. It's to maintain it on a full month that was a bit challenging, especially when we had that jamming in between the lifters, so you had to do some wash out of the SAG and then the throughput drop. But we can -- we even reach more than that. But our -- what we're planning to do is to try to have a stable throughput at nameplate. This is our goal for now.

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Lawson Winder, BofA Merrill Lynch, Research Division - VP & Research Analyst [48]

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And then just to be clear, is the plan to exit 2019 at 4,200 tonnes per day nameplate, is that the idea? Or is it to average that for the quarter?

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Benoit Desormeaux, SEMAFO Inc. - President, CEO & Director [49]

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We're looking to average 4,000. What I'm saying is on different days, you could reach 4,200, 4,300.

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Lawson Winder, BofA Merrill Lynch, Research Division - VP & Research Analyst [50]

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Yes. That's perfectly clear. And then just there was a pretty significant build in working capital in the quarter. So accounts payable, accounts receivable, inventories, all sort of went in a different direction. Is that something that we could see unwind in Q4?

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Benoit Desormeaux, SEMAFO Inc. - President, CEO & Director [51]

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We think, probably one of the biggest increase is the stockpile at Boungou. Most of it has been completed. There is still some to come in the fourth quarter. We're still looking to stockpile like 250,000 tonnes on the stockpile in the fourth quarter. After that, I would say it's -- we're pretty much done. That was the mine plan we had in the feasibility study to reach that kind of production and to get to those 6 grams. We had to stockpile that kind of tonnes. But that was the plan even in the feasibility study, so there is both almost done.

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Lawson Winder, BofA Merrill Lynch, Research Division - VP & Research Analyst [52]

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Okay. So could expect just a little bit of a build in the quarter, but that would just be from inventory as opposed to accounts payable, receivables, would that be fair?

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Benoit Desormeaux, SEMAFO Inc. - President, CEO & Director [53]

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The accounts payable, I would say, it's fairly stable. It may change from one quarter to a quarter, but it's really a question of timing. Accounts receivable, yes, you should see some decrease in the fourth quarter. There's a question of timing as well in there as opposed to stockpile.

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Lawson Winder, BofA Merrill Lynch, Research Division - VP & Research Analyst [54]

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Okay. And then just on the water situation at Boungou, how was the rainy season with respect to the water storage facility? Was it filled to a sufficient level to get you through to next year's rainy season? And what is that exact level? And I think the capacity was 2 million cubic meters. Is that correct?

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Unidentified Company Representative, [55]

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Yes. We're full capacity right now. The rainy season was great this year. We had over 800 millimeters of rain. So everything is full. So we have plenty of water and all the reservoirs are full.

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Lawson Winder, BofA Merrill Lynch, Research Division - VP & Research Analyst [56]

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Okay. Well, that's fantastic news. And then maybe just one final question from me from more of a corporate strategic point of view. So at the Investor Day, I think you guys had talked a little bit about targeting year-end 2019 for a decision on shareholder returns. Just curious, I mean, does that time line get impacted at all by what happened with the Wona North pit wall? Or are you guys still targeting that time line?

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Benoit Desormeaux, SEMAFO Inc. - President, CEO & Director [57]

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I think that time line is the time line. Of course, the pit wall failure, of course, created a special situation that will be taken into consideration. But we know that at some point -- we always said we will be waiting until the underground is -- development is completed. We know we have debt to reimburse. But at some point, we'll have a clear view on our cash flow going forward, and a decision has to be taken at some point. So the timing is the timing at the end of the year.

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Operator [58]

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(Operator Instructions) And at this time, we have no further questions. Please proceed.

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John W. Jentz, SEMAFO Inc. - VP of Corporate Development & IR [59]

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Thank you. I'd like to take this opportunity to remind listeners that our third quarter 2019 MD&A and financial statements are available on our website or on SEDAR. The audio webcast of this conference call will also be available for replay on our website for a period of 30 days. Thank you, and have a good day.

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Operator [60]

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Thank you. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. And at this time, we do ask that you please disconnect your lines. Enjoy the rest of your day.