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Edited Transcript of TGZ.TO earnings conference call or presentation 1-Aug-19 12:30pm GMT

Q2 2019 Teranga Gold Corp Earnings Call

TORONTO Aug 22, 2019 (Thomson StreetEvents) -- Edited Transcript of Teranga Gold Corp earnings conference call or presentation Thursday, August 1, 2019 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David W. Mallo

Teranga Gold Corporation - VP of Exploration

* Navindra Dyal

Teranga Gold Corporation - CFO

* Richard S. Young

Teranga Gold Corporation - President, CEO & Director

* Trish Moran

Teranga Gold Corporation - Head of IR

* William Paul Chawrun

Teranga Gold Corporation - COO

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Conference Call Participants

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* Carey MacRury

Canaccord Genuity Corp., Research Division - Analyst of Metals and Mining

* Wayne Lam

RBC Capital Markets, LLC, Research Division - Senior Associate

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Presentation

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Operator [1]

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Good morning, and welcome to Teranga Gold's conference call for the second quarter and 6 months ended June 30, 2019.

As a reminder, this call is being recorded. Your host for today is Trish Moran, Vice President, Investor Relations and Corporate Communications. Ms. Moran, please go ahead.

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Trish Moran, Teranga Gold Corporation - Head of IR [2]

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Thank you, operator, and good morning, everyone. Before we get started, I would ask everyone to view Slide 2 of our slide presentation to view our cautionary language regarding forward-looking statements and the risk factors pertaining to these statements. Our quarterly presentation is available on our website at terangagold.com.

With us on today's conference call is Richard Young, Teranga's President and CEO; Paul Chawrun, our COO; and Navin Dyal, Senior Vice President and CFO.

Following management's formal remarks, we will then open the call for your questions.

And now over to Richard.

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Richard S. Young, Teranga Gold Corporation - President, CEO & Director [3]

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Well, thank you, Trish, and welcome, everyone. Thank you for joining us today to discuss our latest quarterly financial, operating and development results.

Following record first half production, Sabodala is on track to achieve 2019 guidance. As we enter the plant commissioning phase, Wahgnion is on budget and on schedule with first gold pour on the horizon. Wahgnion is expected to increase company-wide production by 50% to between 300,000 and 350,000 ounces of gold production per year. It will also lower our all-in sustaining costs and double our free cash flow. And it appears that the timing of our second mine coming into production could not be better as gold prices have reached a 6-year high.

We run our business to make money and generate free cash flows at $1,200 to $1,250 gold. But we always want to make sure that we're well positioned in a rising gold price environment. At the time of acquiring Wahgnion in 2016, we believe that mine supply was likely going to be challenged moving forward, and that with rising demand, gold prices would ultimately rise. Rolling forward to today, gold prices have reached a 6-year high based on a combination of factors. Global mine supply is challenged as reserves are declining. Global debt levels are reaching new highs. Negative yield bonds have pushed past $13 trillion, with more than half of this amount stemming from Europe. Diversification from U.S. dollar continues as central banks continue to add reserves with record purchases in 2018 and the first half of 2019. These factors together against the backdrop of trade wars and geopolitical tensions, and you see why there is growing global demand for gold.

What this means for Teranga is that we may be entering a long-term bullish phase for gold after having assembled a very solid organic growth pipeline at what may have been the bottom of the cycle. And so with Wahgnion in commissioning, we're already thinking about our next phase of growth. We're moving our most advanced exploration project, Golden Hill, towards a preliminary economic assessment, and we'll be increasing our exploration budget later this year in Côte d'Ivoire. These are interesting times for both the gold industry and especially for Teranga.

With that, I'll ask Paul Chawrun to run through our operating and development highlights for the second quarter. Paul?

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William Paul Chawrun, Teranga Gold Corporation - COO [4]

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Thank you, Richard. Turning to Slide 6. Sabodala achieved production of 63,436 ounces for the second quarter. And while it was a solid quarter, it is down 3% versus the second quarter of 2018 when we achieved the highest second quarter production in company history. In total, we produced 135,000 ounces of gold in the first 6 months, making it a record first half and representing a 5% increase from the prior year period. At the midpoint of the year, Sabodala is well on track to achieve the mine's full year guidance range of between 215,000 and 230,000 ounces.

During the quarter, mining activities focused on the 3 deposits highlighted on Slide 7. We mined just over 7 million tonnes of material during the quarter, approximately 2 million tonnes lower than we had planned. Material movement was negatively affected by the performance of our production drill fleet.

Priority was given to the Golouma West and Kerekounda pits, resulting in no impact to the ounces mined for the quarter or to the 2019 mine plan. The majority of the shortfall was from Sabodala Phase 4 pushback waste stripping. 3 rental production drills were delivered to site in June, and we are already seeing a positive effect on the mining rates. As well, new drills have been ordered, consistent with the life-of-mine plan, and delivery is expected early next year. We anticipate total tonnes mined to return to the budgeted mining rate for the second half of 2019.

During the second quarter, more than 1 million tonnes were processed at a gold recovery rate of 91% and a head grade of 2 grams per tonne. The grade was lower year-over-year, given that we were mining the final benches of the high-grade Gora pit during the second quarter of 2018. Grade processed at Sabodala for the first 6 months of this year improved to 2.16 grams per tonne and is tracking above guidance.

Turning to Slide 8. Reconciliation to reserves remains positive for the second quarter. Total ounces mined exceeded the reserves model estimations due to ongoing dilution control or recovery processes and conservative resource modeling.

Turning to Slide 9. While total mining costs were similar to the prior year period, mining unit costs increased 12% to $3.18 per tonne. For the half year, mining unit costs were $2.86 per tonne, which is slightly above our guidance range for the year. We expect this metric to improve now that the production drill capabilities have normalized.

Total processing costs in the second quarter improved by 6% year-over-year to $12 million. This is due primarily to favorable currency movements and lower repair and maintenance costs due to scheduling, partially offset by higher fuel prices. On a unit cost basis, the processing cost per tonne improved by 12% during the quarter due to greater tonnes milled and lower costs between periods. Processing costs at $11.47 per tonne for the half year are tracking below the lower end of our full year guidance rate of $12 to $13 per tonne.

Moving to Slide 10 for an update on the development of Wahgnion. We are pleased to report that the mine construction continued to progress as planned during the quarter. Construction is on time and is on budget. Additionally, the team at site has now worked more than 5 million hours without a lost-time injury. And in fact, there has not been 1 LTI associated with the project to date. The project team is simply doing an outstanding job. With construction largely complete, we are now shifting gears to commissioning. Early stages of the operations handover have begun, and the first ore has passed through the crusher and reclaim systems. The SAG and ball mill commissioning is ongoing, having successfully completed the installation tests. With that, we remain on track for the anticipated mill commissioning and first gold pour in Q3, with production ramp-up throughout Q4.

The other areas of the project are now complete, such as the tailings management facility, mine services areas and completion of the 2 resettlement sites. Based on the current progress, production at Wahgnion is expected to be in line with the mine's 2019 production guidance of between 30,000 and 40,000 ounces.

With Sabodala operating well and the construction of Wahgnion almost complete, we are investing in the next stage of our organic growth pipeline, starting with Golden Hill, which is shown on Slide 11. In February, we announced an early-stage initial resource estimate for Golden Hill's most-advanced prospects. During the second quarter, we conducted an airborne geophysical survey and gathered some positive insights for the follow-up evaluation. The airborne geophysics and the other field work conducted during the quarter will be used to guide us through a 27,000-meter drilling and exploration program that we announced last week. This program is intended to advance engineering, environmental and social work to support a preliminary economic assessment and the mine license application in 2020.

Now over to Navin to discuss the financial results.

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Navindra Dyal, Teranga Gold Corporation - CFO [5]

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Thank you, Paul. Hello, everyone. Operationally, the second quarter was solid, with strong production from Sabodala and per ounce cost within or below our full year guidance ranges, leading to another strong quarter of cash flow generation from Sabodala. As well, we made some modifications to our hedging portfolio, from which we expect to benefit. However, I would like to highlight 3 noncash items, which reduced earnings: losses from gold derivative instruments; higher mine operation expenses, related to noncash stockpile inventory movements; and an increase in depreciation and amortization expense relating to a higher proportion of ore feed sourced from deposits with higher capitalized costs.

With these in mind, let's review the financials, starting with Slide 13. Revenue in the second quarter was $84 million, 3% lower than the prior year, due to a decrease in gold sales as a result of lower head grades and recovery rates. For the half year, revenue rose by 2% to $176 million, with an increase in total ounces sold.

With the gold price at its highest level in 6 years, we recently made some modifications to our existing gold hedging program. As a reminder, this program was originally put in place to provide greater cash flow certainty through the completion of construction of Wahgnion. The recent modifications to our hedge program have allowed us to lock in gains from the recent gold price climb and participate in higher gold prices.

Firstly, we rolled over 51,000 ounces of existing forward sales contracts to the first half of 2020. These contracts have an average forward price of $1,330 per ounce. Secondly, we entered into 0 cost collars for a total of 67,100 ounces for the second half of 2019 at an average price range of between $1,380 and $1,465 per ounce. Over the last 2 years to June 30, hedges which have been settled have realized about $9 million in cash. At current gold prices, realized gold losses on hedges yet to be settled would amount to approximately $6 million.

Using our budget price assumption of $1,250 per ounce, we expect the hedge program will provide at least $10 million in additional free cash flow for the balance of 2019. As well, the collar structure allows us to participate in the current high gold price environment.

Moving now to our per ounce metrics on Slide 14. Total cost of sales per ounce sold increased by 12% and 6% for the 3- and 6-month periods, respectively, mainly due to higher noncash inventory movements and higher depreciation and amortization expense, mainly due to ore feed sourced from deposits with higher capitalized costs. All-in sustaining costs for the quarter increased by 3% to $870 per ounce as a result of a reduction in the number of gold ounces sold, and for the half year, improved by 3% to $837 per ounce. The half year improvement was due to a higher volume of gold ounce sales -- gold ounces sold and lower mine production costs, partially offset by higher mine site capital expenditures.

Looking at the bigger picture, per ounce costs are tracking well below or within the full year guidance ranges provided for Sabodala.

Moving to Slide 15. As I mentioned at the outset of my remarks, there were 3 noncash items that impacted our earnings this quarter, with the largest being the noncash loss associated with gold derivative instruments. As a result, gross profit and EBITDA were lower year-over-year, both for the 3- and 6-month periods, despite Sabodala's solid operating performance. Adjusted EBITDA, which removes items not reflective of underlying performance, including gains and losses on derivative instruments, decreased by 14% for the quarter and improved by 4% for the half year.

Turning to Slides 16 and 17. Net loss for the 3- and 6-month periods were $0.07 per share and $0.10 per share, respectively. This compares to net profit in the prior year -- prior 3 and 6 months of $0.11 per share and $0.14 per share, respectively. Net loss for the current year was negatively impacted by noncash losses on gold derivative instruments, whereas in the prior year, gains on gold derivative instruments contributed to higher net profit. As well, the first half results of 2019 included $10 million tax assessment in Senegal, which is recorded in Q1.

In the second quarter, we reclassified $3.5 million from income tax expense to other expense to account for the final split between income taxes and interest and penalties. We also paid $3.4 million of the $10 million owing. The balance is expected to be paid over the next 9 months.

As we do every quarter, to assist you in your analysis, we provided adjusted net profit, which excludes items not reflective of our underlying performance. Adjusted net profit, which excludes gains and losses on derivative instruments, among other items, for the 3- and 6-month periods of 2019 were $0.03 and $0.05 per share, respectively.

Moving to Slide 18. Let's look at our cash flow. Operating cash flows before changes in working capital decreased to $19 million and $46 million for the 3- and 6-month periods, respectively. Operating cash flow after changes in working capital were steady at $19 million in Q2 compared to the prior year quarter, and for the first half of the year, increased to $69 million from $33.9 million (sic) [$32.9 million] in the first 6 months of 2018.

The significant increase in the first 6 months is attributable to higher revenues, the timing of supplier and government royalty payments, and $13 million in gross proceeds from an advance on 10,000 ounces of future Sabodala production, and partially offset by higher income tax payments in the current year.

Now let's turn to our liquidity on Slide 19. We've been actively managing our balance sheet during the construction of Wahgnion. As of June 30, we had cash and cash equivalents of $41 million compared to $56 million at March 31. During the second quarter, approximately $37 million was spent on Wahgnion construction-related activities, including capitalized preproduction operating costs. To date, we have spent $207 million on construction for Wahgnion of a total construction budget of about $250 million. Since the beginning of the year, our Taurus debt has increased by $49 million, $35 million from Wahgnion credit facility, of which $28 million remains undrawn; $14 million from the Golden Hill facility that was repurposed on a short-term basis for Wahgnion operating capital, of which $11 million remains undrawn. In total, we have drawn $161 million on our Taurus debt facility.

In addition, we have also drawn $7 million of a $12.5 million Caterpillar Finance equipment facility during the quarter. As we head into the final stages of the project, Wahgnion remains on budget with contingency still remaining.

Overall, a solid quarter, and we are on track to meet our production and cost guidance for the year.

This summarizes the financial highlights. 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) And our first question comes from the line of Wayne Lam from RBC.

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Wayne Lam, RBC Capital Markets, LLC, Research Division - Senior Associate [2]

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Just wondering, given the performance of Sabodala to date, relative to the guidance, you guys are running about 60% of production guidance and below the lower end on cash costs. Should we expect a bit of a slowdown in production and a little bit higher costs through the back half of the year? Or this guidance just appeared to be a bit conservative relative to what's been delivered so far through H1?

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William Paul Chawrun, Teranga Gold Corporation - COO [3]

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Well, that's a great question because we had a great first half. So the guidance at 215,000 to 230,000, well, that's our guidance that we put at the beginning of the year. So that, I may want to say is a little conservative. However, we are entering into rainy season now. So we're going to stick to the guidance that we have at 215,000 to 230,000.

And in terms of costs, we have a good handle on the costs. The unit costs were a little high in Q2 just because we reduced the waste stripping over in the Sabodala Phase 4. But as I mentioned when we went through the presentation, it doesn't affect our production for the year.

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Richard S. Young, Teranga Gold Corporation - President, CEO & Director [4]

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So Wayne, overall, the second half will be lighter. Guidance may be a little bit conservative, but we'll update the market at the end of Q3.

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Wayne Lam, RBC Capital Markets, LLC, Research Division - Senior Associate [5]

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Okay. Sounds good. And then just on Wahgnion. Can you just comment on the new mine plan that you guys are evaluating? What's being changed? And what's the timing on that?

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William Paul Chawrun, Teranga Gold Corporation - COO [6]

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Well, we've got our guidance. Again, guidance, 30,000 to 40,000 ounces for the year. We are well ahead of commissioning from when we originally started this project 2 years ago. And as a result, we need to build up an inventory and manage the pits. So we've increased our waste stripping, and of course, our ore tonnes mined for the year.

And in terms of what it looks like, we're still working through optimization and, of course, into 2020. It's still a little early days for us to know what the grade is. I think that's what you're asking in terms of what does it look like. And then we're in the middle of commissioning right now. We've already done the mill installation test, and we're getting close to the wet ore, and then we move through. And then we'll reevaluate where we're at in terms of guidance at the end of Q3 once we get the plant going.

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Wayne Lam, RBC Capital Markets, LLC, Research Division - Senior Associate [7]

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Okay. And then just to confirm, you guys have spent about $207 million out of $250 million, so there's about $40 million, $45 million left to spend?

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Navindra Dyal, Teranga Gold Corporation - CFO [8]

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Wayne, yes, that's right. Yes, $207 million is the construction capital. We've provided guidance this year of $115 million to $120 million related to the balance of the construction capital. So that's what that number essentially represents. So we've spent $75 million to date. So yes, $40 million to $45 million left to go on the construction.

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Wayne Lam, RBC Capital Markets, LLC, Research Division - Senior Associate [9]

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Okay. Great. And then just last one. On the tax assessment, it looks like it came in pretty close to your estimate disclosed last quarter. What's the outstanding issues? And what needs to be done to get to a resolution?

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Richard S. Young, Teranga Gold Corporation - President, CEO & Director [10]

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Well, Wayne, it's resolved. We've agreed on the settlement. And there are some things, as we mentioned in the first quarter, where, as with any international company, there are some tax structures that we put in place that we'll have to simplify to eliminate this type of issue going forward. But we've settled on the assessment, and we've made the first payment, and we'll pay the balance over the course of the next 9 months.

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Operator [11]

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Our next question comes from the line of Carey MacRury from Canaccord Genuity.

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Carey MacRury, Canaccord Genuity Corp., Research Division - Analyst of Metals and Mining [12]

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I just had a question on Wahgnion CapEx. You mentioned $40 million to $45 million left to go for the year. Just wondering how the split of that looks like over Q3, Q4?

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Navindra Dyal, Teranga Gold Corporation - CFO [13]

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It's Navin here. So yes, it's $45 million -- $40 million to $45 million left to go, but as we said, we have about 30 -- about 1/3 left of contingency remaining. And perhaps, that number becomes a bit lower. We would expect that, as with commissioning as ramping up now, that we would see, majority of that, if we were to spend it, spent in the third quarter. However, as with any project, you will see a little bit of payments just due to the natural timing of delays of just getting invoices being paid well into the fourth quarter. So that's what we have assumed at this point. And so I would expect perhaps a little bit more heavily weighted in the third quarter, but then still having invoices paid through December.

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Carey MacRury, Canaccord Genuity Corp., Research Division - Analyst of Metals and Mining [14]

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And just remind me, what's the contingency remaining on this?

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Navindra Dyal, Teranga Gold Corporation - CFO [15]

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We've got about 1/3 remaining of contingency, about $8 million.

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Carey MacRury, Canaccord Genuity Corp., Research Division - Analyst of Metals and Mining [16]

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Okay. And then in terms of the stockpile at Wahgnion, how is that shaping up in terms of tonnes and grade?

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William Paul Chawrun, Teranga Gold Corporation - COO [17]

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Well, the grade is very difficult to measure for a couple of reasons. The project is ahead of schedule. So we actually just set up the SGS facility to be able to manage hundreds of samples a day on site. So there's been a limited amount of assays returned just on the grab samples from the ore that's been recovered.

And secondly, it has been reconciled to the mill. So it's early days to know how we're reconciling. What I also can say that with the RC drilling has been quite positive as we go at depth. And then, I guess, the other element is we just need to execute on being over covered from the ground. So we really haven't set all that up yet. Some of the mine technical team hasn't gotten ahead of the grade control as much as we would like, just because of the early stages of the project. We're several months ahead from what we originally planned.

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Carey MacRury, Canaccord Genuity Corp., Research Division - Analyst of Metals and Mining [18]

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And what about in terms of tonnes, stockpile?

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William Paul Chawrun, Teranga Gold Corporation - COO [19]

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Yes, the stockpile is above a gram, almost 200,000 tonnes.

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Carey MacRury, Canaccord Genuity Corp., Research Division - Analyst of Metals and Mining [20]

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Okay. And then maybe just on Golden Hill. Good to see you guys are back on drilling that. Is the focus there on infill drilling to support a PEA around the existing resource? Or is it more step out or a combination of both and the time line to getting to the PEA?

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Richard S. Young, Teranga Gold Corporation - President, CEO & Director [21]

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Carey, I'm going to turn that over to David Mallo, our VP of Exploration, to answer that.

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David W. Mallo, Teranga Gold Corporation - VP of Exploration [22]

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Yes. Carey, the program is designed to do both. We want to expand the known resources at the prospects that we already have numbers for. And we also have a number of new targets that we'd like to evaluate and try and increase our resources, especially looking at near surface oxides, but it's going to be a very busy time. We plan to start with 1 drill during the rainy season and maybe increase to 2 or 3 by the end of the year.

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Richard S. Young, Teranga Gold Corporation - President, CEO & Director [23]

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Carey, just to remind you, we are in the exceptional renewal period for that permit. So the focus will be on completing a PEA, which you can do on resources as opposed to reserves to apply for a mine license next year. And so we'll apply for the mine license next year, and then we'll ultimately come back and do that infill drilling as we complete a feasibility study.

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Carey MacRury, Canaccord Genuity Corp., Research Division - Analyst of Metals and Mining [24]

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Okay. Great. And then maybe one more question on liquidity. Obviously, Wahgnion nearing completion here. Do you expect to fully draw down on your facilities? Or do you think you can kind of get through it without fully drawing it down?

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Navindra Dyal, Teranga Gold Corporation - CFO [25]

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Well, Carey, the plan is to fully draw down on the facility. But how -- if we end up not spending all of the contingency or all the project costs, perhaps we don't end up drawing the full amount, but the plan currently, as it stands right now, is to draw down the full amount of the $165 million for the project facility.

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Operator [26]

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And there are no further questions at this time. I will turn the call back over to Mr. Young for closing remarks.

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Richard S. Young, Teranga Gold Corporation - President, CEO & Director [27]

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Well, thank you, everyone. As you can tell, our #1 focus right now is the completion of construction of Wahgnion and preparing for a smooth commissioning. At Sabodala, we expect to maintain our strong operating performance towards full year guidance. And exploration is going to get meaningfully kick-started at Golden Hill in the back half of this year as is our programs in Côte d'Ivoire.

So that wraps up our call today. And operator, you may now close the line. Thank you.

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Operator [28]

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And this concludes today's conference call. You may now disconnect.