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Edited Transcript of SMF.TO earnings conference call or presentation 3-May-17 2:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 Semafo Inc Earnings Call

Saint-Laurent May 9, 2017 (Thomson StreetEvents) -- Edited Transcript of Semafo Inc earnings conference call or presentation Wednesday, May 3, 2017 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Benoit Desormeaux

SEMAFO Inc. - CEO, President and Executive Director

* Michel A. Crevier

SEMAFO Inc. - VP of Exploration & Mine Geology

* Robert Lavalliere

SEMAFO Inc. - VP of Corporate Affairs & IR

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Conference Call Participants

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* Josh Wolfson

Eight Capital, Research Division - VP and Senior Analyst

* Kerry Smith

Haywood Securities Inc., Research Division - VP, Senior Mining Analyst and Director

* Michael J. Gray

Macquarie Research - Gold Analyst

* Robert Reynolds

Crédit Suisse AG, Research Division - Research Analyst

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen, and welcome to the SEMAFO's First Quarter 2017 Earnings Release Conference Call.

(Operator Instructions) Please note that this call is being recorded today, Wednesday, May 3, 2017, at 10 a.m. Eastern time.

I would now like to turn the meeting over to Mr. Robert Lavalliere, Vice President, Corporate Affairs and Investor Relations. Please go ahead, Mr. Lavalliere.

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Robert Lavalliere, SEMAFO Inc. - VP of Corporate Affairs & IR [2]

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Thank you, Jessa. And good morning, everyone.

Members of SEMAFO's senior management team joining me today for the call are Benoit Desormeaux, President and Chief Executive Officer; Martin Milette, CFO; Michel Crevier, Vice President, Exploration and Mine Geology; Sylvain Duchesne, Vice President, Engineering and Construction; and Patrick Moryoussef, Vice President, Mining Operations.

I would 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 expectation regarding the market price of gold, timetables, mining operation expenses, capital expenditures, guidance and resources and reserves estimates. Such statements are given as of the date of this conference call and involve risks and uncertainties. A number of factors and assumption were made in preparing such statements, and actual result could differ materially. Accordingly, you should not place undue reliance on forward-looking statements. For additional information with respect to forward-looking statement, risk and assumptions, please consult our Q1 2017 MD&A 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 statement, except as required by law. I make this cautionary statement on behalf of all SEMAFO spokesperson who may address you during this conference call today.

All amounts are referred to as dollars.

With that said, I would like to turn the call to over -- Benoit Desormeaux.

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

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Thank you, Robert. Good morning, everyone, and welcome to our conference call on our 2017 first quarter operational and financial results.

As we have already discussed our first quarter full production on our April 24 conference call, I will summarize the key production points in Q1 and then move on to other aspects of our 2017 results.

Operationally, it was a difficult quarter. We processed 732,000 tonne of ore in the quarter at an average grade of 2.55 grams per tonne, for a quarterly production of 55,400 ounces of gold, a 10% decrease relative to the prior year's quarter, at a total cash cost of $699 per ounce and all-in sustaining cost of $892 per ounce. As previously mentioned, the mine grade was adversely affected by the geological interpretation of the upper portion of Zone 9 in the Siou pit. The upper portion of Zone 9 presents a complex geometry, as the area comprises the junction of 3 different zones. Going south of the upper-part Zone 9, the geometry becomes simpler and more consistent at depth. While the April 24 press release included 1 cross-section, we have included additional cross-sections of Zone 9, 55 and 56 at 15 -- 50-meter spacing on our website.

In light of our first quarter challenges, we revised our 2017 guidance to between 190,000 and 205,000 ounces of gold at an all-in sustaining cost of between $920 and $960 per ounce.

From a financial perspective, a 2% appreciation in the gold price improved our average realized gold price on a year-over-year basis to $1,223 per ounce. Gold sales in the quarter reached $67 million compared to $75 million in the first quarter of 2016. The 10% decrease in gold sales is caused by the lower gold ounces sold, partially offset by the increase in the average realized selling price. Mining operating expense increased in the quarter mainly as a result of higher operational strip ratio and higher throughput. In addition, depreciation of property, plant and equipment increased by $7.9 million due to an increase in capitalized stripping activities at Siou at depth. As a result, we incurred an adjusted net loss attributable to shareholders of $4.4 million or $0.01 per share compared to an adjusted net income of $11 million and $0.04 per share in 2016.

Notwithstanding the above, we generated $23 million in cash flow from operating activities, which allowed us to close the quarter with $255 million in cash and cash equivalents.

Our long-term debt stands at $60 million, and we have access to an additional $60 million.

The development of the Boungou Mine or the Natougou project is progressing according to plan. Detailed engineering is now complete. Principal suppliers have been selected. The mining contractor is on site, ready to go. Earthworks for the water storage facility and the processing plant are progressing. Construction of the resettled village and living quarters for personnel is ongoing as well. Close to 1,000 people, including contractors, are employed on site.

We continue to improve the [NPVs] of the project. In the feasibility study, the capital expenditures for the power plant were based on a BOOT scheme over a period of 3 years. Accordingly, a portion of the capital expenditures was to be deferred over the first 3 years of production and accounted for as a deferred capital expenditures. However, we conclude that it was more cost-effective to purchase the power plant up front rather than pursue a BOOT scheme. Therefore, deferred capital expenditures for the power plant have been reduced by $12 million, while initial capital expenditures have been increased from $219 million to $231 million. Furthermore, the selected power plant is expected to deliver energy savings of approximately $600,000 per year over the life of mine compared to the feasibility study. I would like to be very clear that this is not an increase in CapEx or a [captive round]. This is an amount that has always been included in our feasibility study CapEx. This is an amount that has been transferred from our deferred CapEx to our initial CapEx.

At the end of the quarter, we formalized the commencement of construction of the Boungou Mine through a ground-breaking ceremony, which was attended by Burkina Faso minister of mines. During the event, the mine was officially named Boungou Mine, after the closest village. Note that you can now follow construction of the Boungou Mine on our website, which we will be updating on a monthly basis with photo and videos.

On the exploration front, drilling is ongoing at Natougou, in the West Flank Sector, with the aim of upgrading the inferred resources on the West Flank to the indicated category. During the quarter, an infill program to drill the West Flank Sector up to 40 meters by 40 meter spacing was 3/4 completed, and some 65% of assay's result were received. Overall, results were in line with the 80 meter by 80 meter model. Exploration on the West Flank in the second quarter will involve further geotechnical holes, as well as drilling on the East Flank at 40 meter by 40 meter spacing. Results from the 24,000-meter drill program carried out on the Trend 045 south of Natougou in the first quarter of 2017 will also be followed up in the second half of the year.

Exploration at Mana in the first quarter focused on testing Siou at depth. Some results from the 16-hole program have already returned significant values such as 11 gram per tonne over 11 meters, 7 gram per tonne over 4.7 meters and 6 gram per tonne over 4.7 meters.

On the (inaudible) relations side, first quarter saw SEMAFO Foundation inaugurate 18 new projects, 15 of which benefited to the community close to the Mana Mine and 3 to the Boungou communities. At Mana, 2 new high schools were opened and a primary school was expanded. In the region close to the future Boungou Mine, SEMAFO Foundation's activity in the quarter helped local communities ensure the [food self-security] of their families, in addition to improving their chances of employment at the mine. To this end, 2 new grain banks were launched to allow locals to benefit fully from the future mine. A sewing center was opened, where members can make work clothes for future mine employees. In addition, 2 training course began in the quarter: a French language course for future employees and a course for local masons to upgrade their brick-making skills.

In closing, I'd like to reiterate our disappointment with our first quarter production and overall results. While we are currently experiencing challenges, we have the right team to face them. We remain financially sound with a healthy cash position with which to build the Boungou Mine, the next step in our growth platform.

Operator, this concludes my formal remarks. I would like to open up the lines for a Q&A session.

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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 Michael Gray from Macquarie.

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Michael J. Gray, Macquarie Research - Gold Analyst [2]

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Yes, it's great to have the sections, the extra 50-meter-space sections posted to the website. Very helpful over that 200 meter strike length. It looks like basically, aside from one section, you've generally mined through the complexity. I'm just wondering laterals that are on strike. It looks like in the plan view and the technical report, it has a little bit more of a strike length. Can you say whether you actually mined through the complexity of Zone 9; or will have, say, by the end of May in its entirety? Or is it a little bit more lateral risk to the mining and the understanding of the reconciliation?

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

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I'll ask Michel to answer that.

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Michel A. Crevier, SEMAFO Inc. - VP of Exploration & Mine Geology [4]

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Okay, let's say, well, it should be around, the elevation, 5,200 by the end of May or slightly deeper. So we will have something like -- the sections are not covering the full length of what we're active. It's a bit more like 400 meters that where we're active presently. So we should be around basically to 5,190 by the end of month.

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Michael J. Gray, Macquarie Research - Gold Analyst [5]

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Okay, great. And the one -- just going through -- have you actually highlighted the location of the high grade? I think you quoted 11 grams per tonne. The drilling to depth at Siou, over I think it was, plus 7 meters.

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Michel A. Crevier, SEMAFO Inc. - VP of Exploration & Mine Geology [6]

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That's much deeper and would be even south of the southernmost section that we did present. So it's south side of that frame, the 11 grams.

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Operator [7]

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Your next question comes from the line Robert Reynolds from Crédit Suisse.

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Robert Reynolds, Crédit Suisse AG, Research Division - Research Analyst [8]

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Could you give us the ore mined split by deposit at Mana in Q1?

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Michel A. Crevier, SEMAFO Inc. - VP of Exploration & Mine Geology [9]

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Yes. Just let me grab this. From Siou, what's the mine? So from Siou, what was mined in the first quarter is something like 280,000 tonnes at something like 3 grams. And then if you look at what we've mined at Fofina, it's 150,000 tonnes at something like 2.6. And we have very little ore coming from Wona, which is 50,000 tonnes at 1.25. So that's really the [top of Wona north] where we're starting stripping. But the rest came from stockpile and lower-grade stockpile.

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Robert Reynolds, Crédit Suisse AG, Research Division - Research Analyst [10]

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You mentioned that -- some of the additional material that you're finding as ore processed. That's the subgrade. I -- which deposit is that mostly coming out of? Is it Siou?

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Michel A. Crevier, SEMAFO Inc. - VP of Exploration & Mine Geology [11]

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The -- because we're mining more tonnes at Siou, yes, there is probably more coming from Siou. But they're coming from both Siou and Wona.

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Robert Reynolds, Crédit Suisse AG, Research Division - Research Analyst [12]

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Okay. And the operating strip ratio at 9.7:1, how do you see that evolving over the rest of 2017?

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Michel A. Crevier, SEMAFO Inc. - VP of Exploration & Mine Geology [13]

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So our plan is the -- I think it's pretty much consistent to what you've seen in the first quarter. The average -- the total strip ratio is something like 20:1. So I would say almost half is operational. Half is capitalized.

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Robert Reynolds, Crédit Suisse AG, Research Division - Research Analyst [14]

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Okay. And then just my last question. When I look at the capitalized strip of 4.9 million tonnes and then about $8 million of capitalized stripping, that's $1.63 a tonne for the capitalized waste stripping. Is that a lower cost than your expensed waste? Or would it be the same? And I guess, following on to that, could you just talk about the mining costs that you're seeing out of the different deposits at Mana?

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Michel A. Crevier, SEMAFO Inc. - VP of Exploration & Mine Geology [15]

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Yes. The figure you're referring to, of course, is the mix of everything that we've stripped. So while we are in Wona, it is cheaper, as we are still at very close to surface. It's really soft material. Sometimes, in Siou, at the top, yes, it is soft material. As we're going deeper, we may have some stripping higher. So cost per tonne in stripping soft material with the $1.60 is a reasonable figure. So the cost per tonne when we're mining ore and when it's hard, it's $2 -- about $2.50. We're also using -- I've mentioned that before, that we're using a local contractor as one to do some stripping when it's really soft material. And it's moving tonnes at $1 per tonne. So we will use them as much as we can since he is much cheaper.

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Robert Reynolds, Crédit Suisse AG, Research Division - Research Analyst [16]

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Okay. And just finally, on Fofina. Is Q2 going to be the last quarter of mining from that deposit?

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Benoit Desormeaux, SEMAFO Inc. - CEO, President and Executive Director [17]

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Yes, definitely.

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Operator [18]

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Your next question comes from the line of Josh Wolfson from Eight Capital.

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Josh Wolfson, Eight Capital, Research Division - VP and Senior Analyst [19]

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Just a quick question on the credit facility. At the current time, are you expected to draw down on the next $60 million tranche in the second quarter?

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

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That's something that we will finalize approaching the end of June. But that's something that is available to us, so that's -- but there is no formal decision that has been made so far.

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Josh Wolfson, Eight Capital, Research Division - VP and Senior Analyst [21]

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Okay. And is there any risk that the potential to draw down on that credit line will be linked to the reconciliation or the production results, I guess, first half of the year? Or is that unrelated at this time?

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

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It is unrelated. We don't see how it would have an effect. As we said, we are expecting to get out of the more complex zone in the coming weeks, so I don't think it will have an effect.

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Josh Wolfson, Eight Capital, Research Division - VP and Senior Analyst [23]

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Got it. And then just one last question in terms of maintaining minimum cash levels as you are going through the construction activities for Natougou. What level of cash would you deem that's being appropriate for minimum balance?

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

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So let's say we're approaching the end of construction to operate. So with Mana, I think $30 million would be fine.

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Operator [25]

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Your next question comes from the line of Kerry Smith from Haywood Securities.

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Kerry Smith, Haywood Securities Inc., Research Division - VP, Senior Mining Analyst and Director [26]

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Ben, I have a couple questions. One, what is the critical path now at Natougou? Is it getting the dams built here in the dry season? Or is it ordering the mill shelves? Or what is the critical path?

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Benoit Desormeaux, SEMAFO Inc. - CEO, President and Executive Director [27]

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No, like you said, you're right, it is the water dam that is being built right now. So that's on the critical path. The mills since have all been ordered. Some are ready to be shipped. This is not a concern at all. So for now, it's getting the water storage facility completed.

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Kerry Smith, Haywood Securities Inc., Research Division - VP, Senior Mining Analyst and Director [28]

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And you're showing that that's actually not going to be finished, so -- or when does it actually finish? Because the Gantt chart shows...

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Benoit Desormeaux, SEMAFO Inc. - CEO, President and Executive Director [29]

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I think there -- yes. On -- I think, on the plans you see -- because there are other water infrastructures that we have to build later, but the water dam is expected to be finished by the -- somewhere by the end of June.

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Kerry Smith, Haywood Securities Inc., Research Division - VP, Senior Mining Analyst and Director [30]

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Okay, okay, so by July at the latest then...

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

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Yes, exactly, before the rain season.

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Kerry Smith, Haywood Securities Inc., Research Division - VP, Senior Mining Analyst and Director [32]

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Okay. And then the -- you reported these 12 holes at depth at Siou. You talked about these 12 holes that you drilled. Are those holes within the current reserve pit at Siou? Or are they actually below the reserve pit?

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Benoit Desormeaux, SEMAFO Inc. - CEO, President and Executive Director [33]

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They are below the reserve pit. They are to expand the resources, as we were trying to define whether we could have an underground operation at Siou. So we did want to increase the inferred and then -- our goal was to then transfer this to the indicated category to evaluate for a pre-feasibility study in first quarter of '18.

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Kerry Smith, Haywood Securities Inc., Research Division - VP, Senior Mining Analyst and Director [34]

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Okay. And you're still going to have that PFS on the underground in Q1 then.

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Benoit Desormeaux, SEMAFO Inc. - CEO, President and Executive Director [35]

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Next year, yes. This is still the objective.

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Kerry Smith, Haywood Securities Inc., Research Division - VP, Senior Mining Analyst and Director [36]

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Okay, okay. And at Nabanga, you talked about this -- you've got these 6 targets that you've been drilling the 56 holes. How proximal to the current resource at Nabanga are those 6 targets? Are they like 20 kilometers away or a couple kilometers away? I'm just curious how close they are.

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Benoit Desormeaux, SEMAFO Inc. - CEO, President and Executive Director [37]

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They're very close, but I will let Michel give you a more accurate figure.

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Michel A. Crevier, SEMAFO Inc. - VP of Exploration & Mine Geology [38]

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Kerry, they're really close by the substructure we're looking at. So inside 1 to 2 kilometers around the Nabanga known deposit.

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Kerry Smith, Haywood Securities Inc., Research Division - VP, Senior Mining Analyst and Director [39]

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Okay. And did any of those 6 targets have resources prior to this drilling that you've done, Michel?

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Michel A. Crevier, SEMAFO Inc. - VP of Exploration & Mine Geology [40]

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No, no, none.

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Kerry Smith, Haywood Securities Inc., Research Division - VP, Senior Mining Analyst and Director [41]

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Yes, okay. So they had some drilling but no reserves, okay. Great.

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Operator [42]

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There are no further questions at this time. I turn the call back over to the presenters.

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Robert Lavalliere, SEMAFO Inc. - VP of Corporate Affairs & IR [43]

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Thank you, Jessa.

I would like to take this opportunity to remind listeners that our first quarter 2017 MD&A and financial statements are available on our website and on the SEDAR website at sedar.com. The audio webcast of this conference call will be also available for replay on our website for a period of 30 days.

I would like to mention that our Annual General Meeting of Shareholder will be held tomorrow at 10:00 a.m. in Montréal, the Club Saint-James; and mention our 2017 second quarter financial and operating results are currently scheduled for publication on or around August 9, 2017.

So thank you very much, and have a good day.

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Operator [44]

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