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Edited Transcript of TMR.TO earnings conference call or presentation 2-May-19 2:00pm GMT

Q1 2019 TMAC Resources Inc Earnings Call

TORONTO May 13, 2019 (Thomson StreetEvents) -- Edited Transcript of TMAC Resources Inc earnings conference call or presentation Thursday, May 2, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Gilbert John Frederick Lawson

TMAC Resources Inc. - COO

* Jason R. Neal

TMAC Resources Inc. - President, CEO & Director

* Lisa Wilkinson

TMAC Resources Inc. - Director of IR & Strategic Development

* Marthinus Wilhelmus Theunissen

TMAC Resources Inc. - CFO

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Conference Call Participants

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* Brock Salier

Sprott Capital Partners, Research Division - Analyst

* Thomas Gallo

Canaccord Genuity Limited, Research Division - Associate Analyst

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Presentation

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Operator [1]

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Thank you for standing by. This is the conference operator. Welcome to the TMAC Resources Inc. First Quarter 2019 Conference Call and Webcast. (Operator Instructions) And the conference is being recorded. (Operator Instructions)

I would now like to turn the conference over to Lisa Wilkinson, Director of Investor Relations and Strategic Development. Please go ahead.

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Lisa Wilkinson, TMAC Resources Inc. - Director of IR & Strategic Development [2]

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Thank you, operator, and good morning, everyone. On behalf of my colleagues, I would like to welcome everyone to our first quarter 2019 conference call. I'd like to remind listeners that on this call, we will be making forward-looking statements. We refer you to our cautionary statements in the news release issued Wednesday, May 1, after the market closed and in the MD&A for the quarter filed on SEDAR and posted on our website.

All forward-looking statements on this call are qualified by those cautionary statements. Also please note that all dollar amounts mentioned in this conference call are in Canadian dollars unless otherwise stated. On the call today, we have Jason Neal, President and Chief Executive Officer; Gil Lawson, Chief Operating Officer; and Maarten Theunissen, Chief Financial Officer. Following the prepared remarks, they will be available to answer questions. This conference call is being webcast and will be available for replay on our website.

I will now turn the call over to Jason Neal.

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Jason R. Neal, TMAC Resources Inc. - President, CEO & Director [3]

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Thank you, Lisa, and good morning, everyone. Our team continues to build on the positive momentum from 2018. And I am very pleased to report our first-ever profit -- positive earnings in the first quarter of 2019, driven by record-high gold production and sales and record-low all-in sustaining cost and cash cost. Maarten will elaborate on our financial performance for the quarter and a few meaningful post-quarter achievements.

Improvement in our operational performance in the first quarter were supported by underlying better performance in the Doris underground mine and in the processing plant. Gil will elaborate on these incremental successes in the operation as well as our progress on planning for the balance of 2019 and beyond.

In the first quarter 2019, we reported our first-ever positive earnings of $0.06 per share. Our all-in sustaining cost and cash cost of $992 per ounce and $658 per ounce both fall within our 2019 guidance. All-in sustaining cost is 11% better than Q4 and 23% better than our full year all-in sustaining cost for 2018. Production of 40,050 ounces and sales of 39,200 are also at record levels and on an annualized basis, within our production guidance for 2019.

The commissioning of the additional gravity concentrators and other plant retrofitting continued through the first quarter. It has been a lot of work for our team to execute a substantial project to drive improvement. We demonstrated a further step of improvement in recoveries in the first quarter with an average recovery of 84% and consistently operating in a range of 80% to 89%. We are not done yet. And while the work on the plant has taken longer than we would have liked, the operating team remains confident in our targets.

About 3 weeks ago when we announced our operating results for the first quarter, we also announced exploration results for Q1 activity. In the Doris North BTD, we had multi-ounce per tonne intersections with extensive visible gold that included areas that will be developed and processed in -- later in 2019. At Naartok East, we are expanding a high grade zone that will be recovered from surface as available plant feed for 2019. And at Suluk, our future underground mine, we expanded higher-grade areas that would logically form the initial years of a mine plan there. I encourage listeners today to review our recent complete investor presentation and our Q1 exploration release found on our website.

We and our shareholders have been very focused on our balance sheet and free cash flow generation. Generating an all-in sustaining cost margin of more than CAD 400 per ounce in the first quarter was a very important step. Given our improved performance, it was the right time for the company to amend our credit agreement to provide additional financial flexibility, both through covenant amendments and the elimination reduction of principal amortization.

On April 30, we announced an amendment to our credit agreement with Sprott Lenders. The amendment eliminates all remaining principal payments for 2019 and for the first quarter of 2020, totaling USD 26 million and reduces and reschedules quarterly payments thereafter to USD 2.5 million per quarter starting April 1, 2020.

Sprott has been an excellent partner to TMAC as we have worked through a difficult and prolonged ramp-up. Our cash borrowing cost is slightly reduced, in that we have the same interest rate but a slight delay in the payment of an existing 2% fee on the outstanding balance. But we did reprice existing warrants owned by Sprott to be a 25% premium to the current trading price, and that is $4.70 per share. We are, of course, very sensitive to share dilution, and this was what we view to be the best approach for our company.

We are very active managers of our balance sheet. As stakeholders are aware, we are planning for our 2019 sealift. We are in the process of renewing the diesel consignment agreement with Macquarie which reduces our working capital investment. TMAC is also in the process of renewing the fuel supply and delivery agreement with the prior agreement signed in 2015 expiring. Maarten will discuss further, but the punch line is that we expect an estimated USD 40 per ounce savings to all-in sustaining cost and cash cost starting in the fourth quarter of 2019.

I'm going to hand the call now to Gil Lawson to cover operations, followed by Maarten who will discuss our financial results and the amendments to our credit facility before concluding with a brief discussion of our path forward and Q&A.

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Gilbert John Frederick Lawson, TMAC Resources Inc. - COO [4]

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Thank you, Jason, and good morning to all. I'll start with an update on plant performance this quarter. In the first quarter of 2019, the plant processed an average of 1,610 tonnes per day at a grade of 10.3 grams per tonne and achieved an average recovery of 84%, which resulted in record production of 40,050 ounces. Plant throughput of 1,610 tonnes per day was below the rate achieved in the fourth quarter of 2018.

The installation of the gravity concentrators did not have a material direct impact on the availability of the circuit. However, it had an indirect impact on the availability of the overall plant. Improving recoveries was a priority more so than throughput which was achieved. And as recoveries continue to strengthen, we will also be able to push throughput harder. The additional gravity concentrators are now installed, commissioned and operational. Work continues on debottlenecking process flows and interaction with the concentrate treatment plant. There has been an improvement in gravity recovery achieved so far. However, this had been partially offset by solution losses in the concentrate treatment plant limiting the overall improvement in net recoveries. We expect these solution losses to decrease once the full impact of the gravity concentrators are realized.

We are also working on incremental optimization projects to scavenge the gold from the solutions leaving the resin circuit, which would provide further insurance against any volatility in concentrate treatment plant performance and incrementally improve recoveries. This incremental improvement project is not significant capital and will not be disruptive as it is the treatment of solutions that have already exited the circuit. So there really is little integration to manage.

Installation of the first surge bin was completed during the first quarter and successfully commissioned in April with initial results showing positive improvements in the operation of the primary grinding mills and flotation circuit. The unit is working as it was designed. The second surge bin has been fabricated, but we have chosen to install and commission the second surge bin sequentially rather than concurrent with the first surge bin to minimize our project execution risk. With the successful installation and commissioning of the first surge bin, the installation of the second surge bin is ongoing.

Underground mine production in the first quarter of 2019 was 144,000 tonnes or 1,600 tonnes per day of ore at a grade of 10.2 grams per tonne containing 47,100 ounces of gold. This production includes 131,700 tonnes of ore at a grade of 10.8 grams per tonne produced from longhole stoping and sill development. Sill development contributed a further 12,300 tonnes at a grade of 3 grams per tonne which is considered to be incremental ore.

Mine production in the first quarter was concentrated in the Doris Hinge, East Limb of the Doris North BTD and in the Doris Connector. The Doris Hinge provides a high grade contribution to the overall feed and will do so for the second quarter as well with some material stockpile likely to be processed in the third quarter.

The East Limb of the Doris North BTD is also high grade and is scheduled throughout the year. In the first quarter, we were just getting to the development of the BTD extension, which Jason will speak to later in the call. And this area starts making a material contribution to the plant feed in the second half of the year to pick up for the current high grade contribution of the Doris Hinge. As well, we are finalizing plans for the Naartok East Crown Pillar recovery from surface, which provides another source of profitable plant feed.

I've spoken on prior calls on the topic of dilution and can say that our performance continues to incrementally improve. Our team at site is very focused on mining ounces rather than tonnes. I would also add that as we work in the higher-grade portions of the ore body, we can see evidence of outperformance of grade versus the block model largely as a result of using our conservative capping in estimating the resource model which is 250 grams per tonne, for example, in the Doris Hinge.

Mine development productivities improved in the first quarter of 2019 and achieved 1,660 meters, averaging 18.4 meters per day compared with 17.6 meters per day during the fourth quarter of 2018. The mine operations continued to focus on increasing development productivity. Part of the additional development work in the first quarter of 2019 included underground infrastructure and ventilation upgrade required to support increasing the development meters per day. The bottom line on mine production and mine development is that we are on track with the plan described on our February call.

Page 5 has a summary of operating statistics for the quarter. This is the data that I've just gone through with the comparison of that same detail over prior quarters. We have achieved record production, and we are continuing to build on our strengthening performance each quarter. I'm looking forward to continuing our positive momentum into the second quarter of 2019.

I'll now turn the call over to Maarten to touch on the financial results in the quarter.

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Marthinus Wilhelmus Theunissen, TMAC Resources Inc. - CFO [5]

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Thank you, Gil, and good morning. In the first quarter of 2019, we achieved record low all-in sustaining cost and cash cost driven by high gold production and sales. All-in sustaining cost for the quarter was $992 per ounce sold which is 30% lower than the first quarter of 2018 and 11% lower than the fourth quarter of 2018. The sustaining CapEx in the first quarter of 2019 was $12.3 million, in line with expectations. Cash costs in the quarter were $658 per ounce sold, which is 37% lower than the first quarter of 2018 and 12% lower than the fourth quarter of 2018.

We sold a record 32,900 ounces during the first quarter for proceeds of $67.9 million...

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Jason R. Neal, TMAC Resources Inc. - President, CEO & Director [6]

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39,200.

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Marthinus Wilhelmus Theunissen, TMAC Resources Inc. - CFO [7]

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At an average price of USD 1,302 per ounce. The profit from mining operations was $17.8 million, and the net profit was $7.2 million or $0.06 per share on a basic and diluted -- fully diluted basis. Adjusted EBITDA for the quarter was $28.6 million. Unadjusted EBITDA, which is not shown on the page, was slightly higher, with the difference being the impact of the change in the U.S. dollar exchange rate applied to the outstanding debt balance.

Cash flows from operating activities was $35.4 million for the first quarter. We ended the first quarter of 2019 with a cash balance of $54.2 million, of which $25.6 million was unrestricted, an increase of $800,000 from the fourth quarter of 2018. The restricted cash balance, which is restricted as it is posted as collateral for environmental rehabilitation obligations and future royalties to Inuit organizations, was $28.6 million at the end of March.

During the quarter, we made $8.8 million of principal repayment against the debt facility, reducing the outstanding principal balance of debt to USD 117 million. As announced on April 30, we have amended our credit agreement with Sprott Lenders to eliminate all remaining principal payments for 2019 and for the first quarter of 2020, totaling USD 26 million.

We have also reduced and rescheduled quarterly principal payments thereafter to USD 2.5 million per quarter starting on the 1st of April of 2020 with the remaining balance due on December 31, 2020. We also have the option to extend the term by 6 months to June 30, 2021 for a 1% fee. These amendments provide additional financial flexibility over the next 2 years through both significantly reduced amortization and easing of covenant restrictions.

The graph on Slide 8 (sic) [Slide 7] shows the cumulative principal repayments under the prior and amended terms of the credit agreement. The amendments require fewer principal payments and are designed to provide a refinancing window for TMAC beginning in the fourth quarter of 2020. The credit agreement with Sprott that was originated in 2016 and amended previously in 2017 was structured as a cash flow loan against the Doris operation. The amendments announced yesterday can be viewed as restructuring the credit agreement as being against both the cash flow generation of the company and the overall value of the Hope Bay belt. The amendment recognizes the improved financial performance of TMAC but also the work that has been done to plan for the next stages of development at Madrid.

As one would expect, Sprott, as the lender, knows our business very well and has completed their due diligence recently. Sprott has been an excellent partner during a prolonged ramp-up at Doris, and we appreciate their endorsement and support shown through these amendments.

We have also been working on various initiatives to provide additional financial flexibility. We are in the process of renewing the diesel fuel purchase and storage agreement with Macquarie where Macquarie purchases and delivers diesel fuel to the Hope Bay site and stores the fuel in our tanks at Roberts Bay. As in 2018 and thus far in 2019, we will purchase and pay for the diesel fuel as it is consumed rather than repay for a full year of diesel consumption which reduces our working capital investment. The price of diesel fuel is fixed in Canadian dollars at the time of delivery.

We are also in the progress of renewing our fuel supply delivery agreement. The 3-year agreement negotiated in 2015 expired at the end of 2018. We now benefit from being an established operation and the involvement of Macquarie through the diesel purchase agreement adds to our strength and position. We now expect, that with the renewed pricing for fuel delivery, diesel cost savings of an estimated USD 40 per ounce in both cash cost and all-in sustaining cost starting in the fourth quarter of 2019. Using our guidance production levels as a base, these would equate to approximately $10 to $11 per tonne savings, shared equally between mining, processing and surface operations.

We also continue to use demand bond structures that we developed last year and are working with our insurance providers to reduce the amount of collateral required. We issued a new demand bond for Madrid during the quarter through a different insurance company. The new demand bond only required 50% collateral compared to the 60% collateral required under the previously issued demand bonds. There is an opportunity to release an estimated $10 million of additional funds in the near term by reducing the amount of collateral required under the demand bonds. And ultimately, all of the collateral will be released in the long term as we demonstrate continued improved operational performance and an improved financial position. There is also an opportunity to issue demand bonds for the $5 million of letters of credit issued as security for royalty and land and mineral access payment that is currently cash collateralized.

With that, I'd like to turn back -- the call back over to Jason.

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Jason R. Neal, TMAC Resources Inc. - President, CEO & Director [8]

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Thank you very much, Maarten. I wanted to close the scripted part of this discussion today first by circling back to exploration. I saved one very good slide for myself. The potential for the Hope Bay mineral inventory to grow and to grow with high grade ore is what has attracted our shareholders and, frankly, our management team. It is one way that we're able to outperform reserve grades by supplementing with growth of higher-grade mineralized inventories. We have outstanding raw material to generate value at Hope Bay. And as we get closer to our operational targets, this can get more significant market attention.

Of the 3 areas of exploration success in the first quarter, I included one slide on the BTD extension where we continue to demonstrate outstanding success. When I asked our VP Exploration for a simple slide to demonstrate the success, this was his best shot. We're exploring in the north end of the zone while we are developing in the south end. The drill holes in this page are all from the first quarter and are measured in hundreds of grams per tonne. This is an oblique view of the ore zone and while only a meter thick, has the potential to deliver significant high grade to our plant.

The different shades of purple represent multi-ounce-per-tonne material, the darkest purple being greater than 4 ounces per tonne. The picture on the right -- the pictures on the right are from our development face at different stages. There is high grade visible gold in our muck samples. The face on the top is a 4-meter width, and it is 23 grams per tonne at 100-gram per tonne cap but 104 grams per tonne on an uncapped basis. The 100-gram per tonne cap is what we are using initially given this is a new zone. But 250-gram per tonne is what we used in the Doris Hinge, and we often outperformed the block model with that assumption.

The face bottom right is 66 grams per tonne for a 3-meter width with a 100-gram per tonne cap and 88 grams per tonne on an uncapped basis. This is a great illustration of the upside at the Hope Bay belt and the Doris Mine.

Moving to the final slide. The first priority is quite obviously to build our cash flow margins. The first pillar supporting that objective is therefore to continue quarter-over-quarter operational improvements in the plant. Our team remains confident in our targets. And as we approach these targets that relate to revenue generation, that being throughput, recovery and grade, we have a greater ability to address unit cost performance as well.

As the throughput of the plant increases, the performance of the mine becomes more important. We are planning and executing on a plan that provides ore feed from multiple areas with a focus on ounces not tonnes. Doris is ramping up, and our plans include a consistent contribution from higher-grade areas. And at Madrid, the very first step is Crown Pillar recovery at Naartok East. Also we're evaluating the start of a portal at Madrid underground targeted at Suluk and Naartok East which we would provide -- which would provide significant plant feed as early as 2021, and we will report further on this as evaluation continues during the year.

Our investment in drilling has nearly doubled in 2019 to 60,000 meters. Resource and reserve growth is essential to the value-generation potential at our company. Our exploration strategy in 2019 which was discussed in greater detail on our February call is a combination of BTD-focused exploration at Doris, a targeted program at Madrid to help us make better near-term development decisions, and at Boston is a revitalization of a project that many believe to be the crown jewel of Hope Bay.

As we look towards the end of the year, we are targeting the completion of an updated prefeasibility study for the Hope Bay belt development. This is about planning for an optimized development of Hope Bay. This will include the identification of options for optimal sequencing, prioritization of capital and opportunities for ongoing value creation. Such a plan also helps us develop our longer-term exploration strategy.

In the mining business, optionality is highly valuable whereas commitments to capital investments can be restrictive and costly if not pursued in an appropriate environment with the -- from a position of strength in which stakeholders support. Our objective is disciplined planning and evaluation to put us in the best possible position to make good, value-generative decisions.

With that, I'll turn the call over to the operator for the question-and-answer session.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Brock Salier of Sprott Capital Partners.

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Brock Salier, Sprott Capital Partners, Research Division - Analyst [2]

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Just a first question focusing on the underground. I think you've been fairly clear here that the below-the-dike materials are going well and you're outperforming reserves. Is there any possibility of sort of giving us a guidance? Do you think the underground grade will be above, let's say, 8.5 grams for the rest of the year or below that number? Or is it something you will sort of formulate as you go along with the below-the-dike material?

And as part of that question, I think we're really expecting Central to kick in next calendar year. Is there any potential to get into Doris Central perhaps towards the fourth quarter?

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Jason R. Neal, TMAC Resources Inc. - President, CEO & Director [3]

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So I'll work backwards to that question. Doris Central, we will get there by the end of the year, but we'll likely be in development. And that's what the plan says right now. And so the quantity of ore that's taken from Doris Central will not be a significant part of what's fed to the plant this year. But we're making an investment in development such that we'll have very consistent availability of ore for 2020. Doris Connector stands between the 2. And Doris Connector, the tonnage is going to rise through the year.

As for the grade that we're able to deliver this year. In the front end of the year, we've got the Doris Hinge as Gil was talking about. We're working through that right now. That is a high-grade area that outperforms the block model often just given where the capping is. We'll be finished that by the middle of the year. But it'll probably -- the feed to the plant will bleed into the third quarter likely.

The BTD East Limb is providing material feed right now. It's also quite high grade. The picture that I went through, the BTD extension, is in development right now, so there's some development ore that comes. The more significant tonnage comes through in the middle of the year. So it kind of takes over at the time that the Doris Hinge is declining. I would say that our objective is -- for the year is to provide a better ore grade than the 8.5 grams that you referenced. We certainly have access to the material that's there. One of the things is that the material that is in the Doris BTD is -- would not all have been in the plan that we would have started with at the beginning of the year just because this -- it's just the nature of the ore body that there's material that can be defined and put through the plant before it ever hits our disclosed reserve or resource statements. So we have great opportunity to outperform the bench -- the level that you set. And that's I think as much guidance as I can provide.

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Brock Salier, Sprott Capital Partners, Research Division - Analyst [4]

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Yes. Perfect. And referring to your PFS and sort of belt development strategy and factoring in the debt refinance, what are your sort of strategic thoughts on spending on both exploration and development? I noticed there was a Madrid North $15 million portal. Any sort of thoughts on when we could see that timing? Is that something that you could potentially look at starting this year? Or you'd sort of like to get things bidded down a bit and perhaps look at that after the PFS is done into next year or the year after?

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Jason R. Neal, TMAC Resources Inc. - President, CEO & Director [5]

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Yes. So what we're doing is we're doing the evaluation work and thinking about the timing of expenditures to put ourselves in a position to the actual. And that portal that I referred takes 300 to 350 days to get to the ore face from when you start it. So we have to think smartly about how we get that going. I don't think we're going to increase exploration expenditures from what we have. We've got $15 million budgeted outside of the Doris underground. And that was all funded through flow-through expenditures -- or is funded through flow-through expenditures. And we've raised that flow-through money last year. I think on prudent spending of exploration dollars, I don't think we should grow our expenditures yet. But we're doing the work to define what our 2020 might -- program may be.

And as far as the surface capital, the Naartok East Crown Pillar, the expansion capital that we have defined in our guidance, about 1/3 of that roughly is for surface at Madrid. And the surface infrastructure that helps us get started at the Naartok East Crown Pillar, that'll also serve us for what we may do in the future at Madrid including a synergy against the portal development.

So the strategy on underground at Madrid is to make sure that those zones are available when the current defined reserves at Doris start trailing off. So that while we expect that we're going to have continued exploration success at Doris and every indication is that will be true, we don't want to bet the company on it, so we want to be able to have multiple sources of ore.

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Operator [6]

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(Operator Instructions) Our next question comes from Tom Gallo of Canaccord Genuity.

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Thomas Gallo, Canaccord Genuity Limited, Research Division - Associate Analyst [7]

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You mentioned the first surge bin was installed in April and a second surge bin is being sort of constructed and installed. I think that's a good approach to do it in a phased way as opposed to do it all at once. First, any expectation on when the second surge bin will be fully installed? And secondly, are there any other major elements to be installed in the plant? Or is it just down now to tweaking and sort of optimizing the plant?

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Gilbert John Frederick Lawson, TMAC Resources Inc. - COO [8]

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Yes. It's Gil here. In terms of the surge, the second surge bin install, it'll commence in May, and it'll be completed in this quarter, second quarter. So that's how I would characterize that. And the -- this is the type of plant where there will be continual optimizations happening. There're so many opportunities in this plant to improve things in incremental ways. So we're going to be tinkering quite a bit with the circuit. It's a circuit that's quite -- it's got a fair amount of complexity to it. But with the complexity comes opportunity. So there's quite a bit of playing with each of the gravity circuits, and each piece has a component that can be improved just marginally and the way they play with each other, between the concentrate treatment plant and the mass pulls of the concentrator. So there's a fair amount of work that can be done to just keep continually improving the circuit.

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Jason R. Neal, TMAC Resources Inc. - President, CEO & Director [9]

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So one other item that we've talked about and is covered in the MD&A is that we're looking to install a column to scavenge the solutions that come off the resins. And that's probably a Q3 project. We're just going through the engineering on it. It's a small project relative to everything that we've done thus far. And as Gil talked through it, it sits right at the back end, so there's no interruption. It takes what is a tail from the system and processes the tail. And the whole reason for that is anybody who's followed our company for the last couple of years knows that there has been volatility in the performance of the resins. And I mean, most plants have a carbon-based system. We have resins. And while we've gotten a lot better at managing the resins and the team has found other resins that are better and the processes have less fouling than you would have heard about in 2017, that's a major, major item.

This scavenger system that goes at the back end basically is an insurance policy against volatility in the performance of the resins. And so maybe it has 1%- or 2%-type impact. But if in the points where the resin isn't performing for some reason, it'll -- it's important insurance for the back end. And that's kind of the way that we're thinking about it now. So we've got all the major items in there. We're in commissioning. So now we're just looking at the standard sort of debottlenecking and then where the small investments that we can use to reduce the volatility performance.

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Operator [10]

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(Operator Instructions) There are currently no questions in the queue at this time. I would like to turn the conference back over to Ms. Wilkinson for any closing remarks.

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Lisa Wilkinson, TMAC Resources Inc. - Director of IR & Strategic Development [11]

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Thank you, operator. Thanks to everyone for joining us today. If you have any further questions, feel free to reach out. Have a good day.

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Operator [12]

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This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.