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Edited Transcript of WDO.TO earnings conference call or presentation 2-May-18 2:00pm GMT

Q1 2018 Wesdome Gold Mines Ltd Earnings Call

TORONTO Sep 17, 2019 (Thomson StreetEvents) -- Edited Transcript of Wesdome Gold Mines Ltd earnings conference call or presentation Wednesday, May 2, 2018 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Heather Laxton

Wesdome Gold Mines Ltd. - Chief Governance Officer and Corporate Secretary

* Duncan Middlemiss

Wesdome Gold Mines Ltd. - President and CEO

* Ben Au

Wesdome Gold Mines Ltd. - CFO

* Marc-Andre Pelletier

Wesdome Gold Mines Ltd. - COO

* Mike Michaud

Wesdome Gold Mines Ltd. - VP, Exploration

* Lindsay Carpenter Dunlop

Wesdome Gold Mines Ltd. - VP, IR

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Conference Call Participants

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* Don DeMarco

National Bank Financial - Analyst

* George Topping

Industrial Alliance - Analyst

* John Tumazos

John Tumazos Very Independent Research - Analyst

* Gabriel Gonzalez

Echelon Wealth Partners - Analyst

* Raghu Agorian

- Analyst

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Presentation

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Operator [1]

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Good morning. Welcome to Wesdome Gold Mines First Quarter 2018 Financial Results Conference Call. I will now turn the call over to Heather Laxton, Chief Governance Officer and Corporate Secretary, to begin today's call.

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Heather Laxton, Wesdome Gold Mines Ltd. - Chief Governance Officer and Corporate Secretary [2]

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Thank you, operator. Good morning, everyone, and thanks for joining us today. Before we begin, we'd like to take this opportunity to remind everyone that during this call , we will discuss our business outlook and make forward-looking statements. These comments are based on our predictions and expectations as of today. Actual events or results could cause outcomes to differ materially due to a number of risks and uncertainties, including those mentioned in the detailed cautionary note contained in yesterday's press release and in the company's management, discussion and analysis dated May 1, 2018. Both documents are available on our website and on SEDAR. Please note that all figures discussed on this call are in Canadian dollars unless otherwise stated. The slide used for this presentation and a recording of this call will be posted on the company's website.

Here this morning, we have Duncan Middlemiss, President and CEO.

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Duncan Middlemiss, Wesdome Gold Mines Ltd. - President and CEO [3]

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Good morning.

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Heather Laxton, Wesdome Gold Mines Ltd. - Chief Governance Officer and Corporate Secretary [4]

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Ben Au, Chief Financial Officer.

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Ben Au, Wesdome Gold Mines Ltd. - CFO [5]

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Hello, it's Ben Au.

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Heather Laxton, Wesdome Gold Mines Ltd. - Chief Governance Officer and Corporate Secretary [6]

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Marc-Andre Pelletier, Chief Operating Officer.

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Marc-Andre Pelletier, Wesdome Gold Mines Ltd. - COO [7]

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Hello, this is Marc-Andre.

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Heather Laxton, Wesdome Gold Mines Ltd. - Chief Governance Officer and Corporate Secretary [8]

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Mike Michaud, Vice President, Exploration.

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Mike Michaud, Wesdome Gold Mines Ltd. - VP, Exploration [9]

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Good morning.

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Heather Laxton, Wesdome Gold Mines Ltd. - Chief Governance Officer and Corporate Secretary [10]

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And Lindsay Carpenter Dunlop, Vice President, Investor Relations.

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Lindsay Carpenter Dunlop, Wesdome Gold Mines Ltd. - VP, IR [11]

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Good morning, everyone.

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Heather Laxton, Wesdome Gold Mines Ltd. - Chief Governance Officer and Corporate Secretary [12]

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And with that, over to Lindsay for a review of the agenda for today's call.

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Lindsay Carpenter Dunlop, Wesdome Gold Mines Ltd. - VP, IR [13]

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Thanks, Heather. The agenda for today's call will be as follows. First, an operational review by Marc-Andre, followed by financial review by Ben. We will then move to an exploration update at the Eagle River and Kiena complexes by Mike. Duncan will then conclude with the summary and outlook. We will then open up the lines up for the question-and-answer session.

Marc-Andre, please go ahead.

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Marc-Andre Pelletier, Wesdome Gold Mines Ltd. - COO [14]

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Thanks, Lindsay. Head grades improvement continue at Eagle River in Q1 2018 with 12 grams per ton in the first quarter compared to 11.3 grams per ton in the previous quarter and 11.5 in Q1 2017. We exceeded our internal budget due to all zones contributing 11% more tons and at 21% higher grade. In particular, the 811 zone, the [mines main] producing structure of the last 25 years performed much better than budgeted confirming the theory the grades from this zone improved significantly at best. Wesdome's strategy is to increase the ratio underground ton to open pit ton, and we work towards this goal in Q1 by increasing our development rate to get the higher level of developed reserve leading to greater production and flexibility.

Furthermore, the newly commissioned [treasury rates] in combination with the rebalanced power distribution is also allowing for more professional flexibility. This, together with our upgraded reserves, had so many product on the path for higher production and lower cost in the short to middle term.

The underground exploration and definition program at Eagle River is progressing as planned with three underground drills fully manned, thereby giving encouragement to the addition of underground work bases, which ultimately result an increased productivity.

At the Mishi Open Pit, results were slightly under budget primarily due to lower grade. We have great (inaudible) product grade at the pit and expect grade at this asset to be over 2.0 grams per ton for the rest of this year.

I will now turn the call over to Ben for the financial review.

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Ben Au, Wesdome Gold Mines Ltd. - CFO [15]

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Thank you, Marc. 2018 is off to an excellent start. From the [ensuring] cost performances, significant improvement on the first quarter of last year. Cash cost and all-in sustaining costs were 12% and 17% lower respectively. Operating cash flow were 1.9 times higher and mine profit was 76% higher.

For the second consecutive quarter, we generated free cash flow in the amount of CAD3.2 million in Q1. The free cash flow is after investing CAD8.5 million in the Eagle River and Kiena properties. We built up CAD4.4 million cash onto the balance and in the quarter were CAD26.5 million, leaving us well positioned to complete our exploration programs and capital projects at the Eagle River and Kiena complexes.

Also during the quarter, we were successfully defending an appeal Revenu Quebec on prior year tax reassessment of CAD5.3 million. Revenu Quebec [had some maturity at the] end of the month to decide whether it wants to make a further appeal to the Supreme Court of Canada. Should Revenu Quebec decide to abandon these legal proceedings where we target to [refer] to CAD2.7 million in tax reimbursement to enhance the income and cash flow.

I will now turn the call over to Mike for a review of exploration.

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Mike Michaud, Wesdome Gold Mines Ltd. - VP, Exploration [16]

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Thanks, Ben. Wesdome had another successful quarter of exploration at both the Eagle River Mine and at [fast]-producing Kiena mine near Val D'Or where underground ramping is complete and initial drilling of the Kiena Deep A zone has returned excellent results.

At the Eagle River Mine, the ongoing exploration drilling and mine development has continued to extend better [gold] mineralization at the parallel 300 East Zone and at the 7 Zone that now account for almost three quarters of the reserves at the Eagle River Mine.

Drifting results in the 7 Zone this quarter returned high grades and with good widths, and demonstrated continuity. This zone at current depths and up-plunge appeared to be comprised of two mineralized areas along the zone that are separated by an area of lower grade mineralization. However, these zones are interpreted to form one continuous longer zone long strike and at [depth].

The main ramp is reaching the next (inaudible) on the 1038 meter level where the mineralization connects and will enable us to have wider mining widths and augmented production rates. The 7 Zone represents 23% of the current reserve ounces at a grade of 13.2 grams per ton.

Both the 7 Zone and the 300 East Zone remain open, up and down plunge, and have excellent exploration potential to the east within the untested areas of the [mine diary] that will achieve our objective of defining resources at shallower depths in the mine that are easily accessible and support our plan to open up new working areas and increase underground production. The potential extension of these zones will remain a priority for underground and surface exploration drilling throughout the year.

At the Kiena Mine in April, we were very pleased to announce results from the first seven holes from the Kiena A zone. We resumed drilling here in March once the exploration ramp was completed. Drilling is going very well. The ramping has allowed for drilling shore to hold up better angles with all but one hole reaching its intended target.

Initial drilling intersected visible hole and several holes within predominantly shear zone hosted quartz veins in mafic and ultramafic volcanic rocks. Highlights include 39.6 grams per ton over 18.2 meters of core length with 12.6 grams per ton cut in hole 6275.

In addition, development on cross-cut level 102 and 103 northeast exposed a narrow-laminated quartz vein named the Prospect vein that returned a grab sample of 227.1 grams per ton gold. Of the 50,000 meters we plan to drill underground this year, approximately 14,000 meters have now been drilled to date on zone A and B, and the auxiliary zone and VC zone.

We will not be drilling any more B zone this year, and the remaining 36,000 meters will focus primarily on the A zone and the Upper Quartz Zone with one drill concentrating on the auxiliary zones. We expect to begin drilling on the Upper Quartz Zone shortly, and we will have another set of zoning results out during Q2.

I will now hand the call over to Duncan for summary and outlook.

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Duncan Middlemiss, Wesdome Gold Mines Ltd. - President and CEO [17]

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Great. Thanks, Mike. We started to enact our plan of increasing the ratio of the Eagle River underground tons to Mishi Open Pit tons. During the first quarter, 57% of the tons came from the underground mine versus 43% from the Mishi Open. This compares to a historical 50/50 split over the past five years.

We expect this ratio to be slightly higher in the second half of the year when we'll bring additional zone 7 and 300 East Zones online. The eventual goal is to fill the mill at 850 tons per day of Eagle River underground ore. At our current reserve rate of 12.2 grams per ton, this would translate into over 100,000 ounces of production per year. This is dependent on exploration success, of course, and the reason why we're committing all (inaudible) exploration dollars to Eagle River this year. All three parallel zones will be drilled with the combination of exploration and definition drilling within reasonable distances to existing construction.

We are also doing a surface program with the objective of testing these parallel zones to surface, possibly adding additional [stows] at shallower depths. We're still compiling the Mishi drilling completed in 2017 and have hired a third-party to complete a review of the current pit area and new discovered zones to the west. We expect to release an update on this asset in due course.

This year's drill [go down] at Kiena at 50,000 meters of underground drilling. Primarily on the Kiena Deep discovery was some drilling on the auxiliary zones, which are located in close proximity to mine infrastructure. The objective of this program is to complete a resource update by year end.

We are currently drilling the Kiena Deep on the 25 by 25 meters spacing where we anticipate the generation has indicated and [inferred] resources. It is early days in the program; however, based upon our first series of holes, I would say we were very encouraged of the prospect of this mine reopening.

In summary, Wesdome's current objective is to be Canada's next intermediate gold producer, producing approximately 150,000 to 200,000 ounces of gold per year. We plan to achieve this by systematic investment into mine exploration, higher grade, higher margin Eagle River underground mine, where reserves stand at 12.2 grams per ton.

By utilizing our existing infrastructures to increase production, this ensures the low CapEx and therefore low risk [path] to increase productions and cash flows by filling the existing mill with higher grade ore. At Kiena with exploration success, our goal would be to reopen the mine with a blend of high-grade Kiena Deep ore and lower-grade VC and S-50 zones. This would be a low CapEx and the low risk restart due to existing mills, shops, underground development, and all necessary permits in place.

I will now turn the call back over to the operator and open the call up to questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And your first question comes from Don DeMarco with National Bank Financial.

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Don DeMarco, National Bank Financial - Analyst [2]

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I just got a question on your mining cost. Can you give me some sort of ballpark of what the costs are per ton for open pit at Mishi underground at Eagle and processing cost?

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Marc-Andre Pelletier, Wesdome Gold Mines Ltd. - COO [3]

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The cash cost for Mishi are at around CAD80 a ton; that's included milling. And at the Eagle mine, I believe it's on CAD200 -- sorry, first milling, so we're CAD300 a ton.

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Don DeMarco, National Bank Financial - Analyst [4]

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CAD300 a ton at Eagle and that also includes milling?

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Marc-Andre Pelletier, Wesdome Gold Mines Ltd. - COO [5]

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Correct. [Thank you].

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Operator [6]

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And your next question comes from George Topping with Industrial Alliance.

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George Topping, Industrial Alliance - Analyst [7]

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The all-in sustaining costs are below guidance in Q1, and then in [text] you talked about it perhaps falling further, Duncan, in the second half. Would I be right in surmising that you're going to be below the lower end of guidance for all-in sustaining for this year?

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Duncan Middlemiss, Wesdome Gold Mines Ltd. - President and CEO [8]

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Well, George, I'd be (inaudible). I mean we've got a lot of months in production ahead of us. But, no, we feel confident about certainly being on just probably the lower end of our guidance. I think what we're seeing right now is we're certainly benefiting for some better margins from higher grades and therefore lower unit cost. But just having a refresh of where we thought internally we would be, I think that we're right on plan right now, George. So, I think that for the time being until we refresh the plan at the end of June, I think we're quite happy with maintaining our guidance.

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George Topping, Industrial Alliance - Analyst [9]

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And now on the capital side, the sustaining we could work out from the guidance for 2018, do you got any plans for project CapEx at Eagle?

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Marc-Andre Pelletier, Wesdome Gold Mines Ltd. - COO [10]

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At Eagle Mine, we basically have some three, four bigger projects, and one is related to power upgrade at the site. We purchased a transformer last year that was installed last month when there was one big thing. We have a power upgrade coming up on the ground, and we're still working on the power upgrade for the line on the surface. We have money for a new mine drive at the site, so we are investing on this appropriately. And we're also looking to put some money on an underground shop; so there's physically money going at the Eagle site for this year.

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George Topping, Industrial Alliance - Analyst [11]

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How much would that be? And is that -- just to be clear, that it's separate from the sustaining CapEx?

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Duncan Middlemiss, Wesdome Gold Mines Ltd. - President and CEO [12]

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Yes, it is, George. We've done at both CAD5 million in what we call project capital. So that's over and above the sustaining. And as Marc-Andre said, it typically (inaudible) the infrastructure improvements like drive and electrical power distribution.

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George Topping, Industrial Alliance - Analyst [13]

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Got it, great. Just one last question with -- for Ben, actually is, on the financials on note 8, there's that customer deposit on the 1800 ounces. What's the background to that? And has that delivery been made or?

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Ben Au, Wesdome Gold Mines Ltd. - CFO [14]

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Yes, George. It's a cash advance from a customer relating to, say, [1800] (inaudible). That's where we delivered in early April. So, we received the cash upfront and fortunately at a better price and what it is in, actually, April.

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George Topping, Industrial Alliance - Analyst [15]

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Yes. Does he want anymore of that price?

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Ben Au, Wesdome Gold Mines Ltd. - CFO [16]

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But not (inaudible). I think the gold price has been volatile. So we have significant inventory that's on end. We like to protect the price with the inventory [on the end].

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Operator [17]

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Your next question comes from John Tumazos from John Tumazos Very Independent Research.

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John Tumazos, John Tumazos Very Independent Research - Analyst [18]

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First question. Are your current cash balances larger than the cost of restarting Kiena, where my guesses are that it might be CAD10 million for scoping and CAD10 million to restart the mill?

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Duncan Middlemiss, Wesdome Gold Mines Ltd. - President and CEO [19]

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John, just to clarify, I don't think the mills are going to cost CAD10 million to restart. It's probably going to cost about CAD1.5 million to CAD2 million. It's really the (inaudible) in terms on what this resource could potentially look like. Obviously, we got 13,000, 14,000 meters of a 50,000 meter program completed. So, we have a lot to learn.

Back of the napkin or the envelope are we like it. I would say that a restart, we needed to get a ramp-down to about 1400 meters from our current elevation. We're around 1050. You're looking at almost a 3.5K of ramping, and [it can cost] -- that are CAD5,000 per meters. So, I don't see the ramp would be almost CAD20 million to get down in those elevations, but we don't really know what elevation we need to go to.

What we also see is the majority of potential restart would be mine development. It would be really developing the reserve's access, ventilation rates and things like that. I had kind of a figure in my head, John, and, again, like I said, qualify it very early but it is probably a CAD40 million to CAD50 million price tag in order to get this up.

But I'll also point out to everybody if we have potentially 400,000 ounces in reserves to start with, that's CAD100 of CapEx per ounce, which I have a hard time seeing anywhere else around the world. So, I think that, that's very attractive. And then there's the whole, I think, advantage that Wesdome has. I mean with the existing infrastructure, we're able to enact low CapEx, low risk strategy in order to bring forth some good returns for our shareholders.

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John Tumazos, John Tumazos Very Independent Research - Analyst [20]

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Thank you. If I could ask a short-term question, the cash balances rose this quarter and there was a free cash flow increase largely due to liquidation of working capital, largely due to 5.1 million increase in current payables. Should we assume in the second quarter, the cash flow and cash balances go down CAD4 million to CAD5 million because you pay your bills?

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Ben Au, Wesdome Gold Mines Ltd. - CFO [21]

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John, it's Ben. I would expect at this quarter with CAD26 million in cash, CAD3 million of that is related to the payable increase. So, I would expect that the cash flow -- the cash balance for Q2, Q3 would be lower than Q1. As far as how much lower, that's really a function of gold price as well as the capital spend rate.

We expect the CapEx rate spend to be -- to be in line with what we spend in Q1 with a bit higher by CAD1 million or CAD2 million in the development cost. But I would expect the gold price given what it is today. We wouldn't to -- if gold price sustained at [CAD700], then we'll be on the cash flow flat basis. If it's lower, then we'll be depleting cash balance.

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Operator [22]

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(Operator Instructions) And our next question comes from a Gabriel Gonzalez with Echelon Partners.

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Gabriel Gonzalez, Echelon Wealth Partners - Analyst [23]

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I'm just wondering you did mention that the target range for Eagle River to Mishi ore ratio in 2018 is going to be slightly higher than the 57% reported in Q1. I'm just wondering by slightly higher, can we expect to, say, around 60% and also alluding to earlier comments, can we expect that to continue through 2019 and really in the longer term as well?

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Marc-Andre Pelletier, Wesdome Gold Mines Ltd. - COO [24]

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For this year as for our -- this is Marc talking, as for our plan in the -- we actually plan to increase the production coming from Eagle Mine around 550 to 600 tons a day versus -- and about 250, 300 tons per day (inaudible). So that's [physically] what we plan for each two.

On the bigger picture on the long run, I mean we surely got to work toward the 850 tons per day from Eagle. It basically depends on two things: our exploration success to find or to extend the new zones or the parallel zones; and to continue to improve our productivity of the operation. So, I'd say probably two, three years down the run as we just go into these new zones.

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Gabriel Gonzalez, Echelon Wealth Partners - Analyst [25]

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And as well, I just wanted to confirm for the Mishi grade for 2018, you did say an average of about 2.0 grams per ton listed. Is that correct?

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Marc-Andre Pelletier, Wesdome Gold Mines Ltd. - COO [26]

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Correct.

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Operator [27]

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And your next question comes from [Raghu Agorian].

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Raghu Agorian, - Analyst [28]

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I have a couple of quick questions; one on Kiena and another on Eagle. Related to Kiena, we have a I believe a very good question on this topic. I wonder what it would cost if somebody wants to build a 2000-ton mill today because it appears the mill only needs a [CAD1 million or a CAD1.5 million] to restart, it means it's in excellent condition. I wonder what it would cost if someone to build a brand new mill, 2000 capacity in Quebec, can you give an estimation?

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Duncan Middlemiss, Wesdome Gold Mines Ltd. - President and CEO [29]

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I think what we've seen in the past is probably all in with the upwards towards CAD100 million, and I'm going to qualify that a little bit. I think now what we see in the mining world is the actual permitting and construction of the tailings, and that entire aspect of it is probably CAD20 million right now. And so I sort of feel comfortable in sort of CAD75 million to CAD80 million for construction of the mill and getting everything there. So, I'd estimated sort of CAD80 million to CAD100 million right now.

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Raghu Agorian, - Analyst [30]

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And again, continuing on Kiena, looking at some [ore] presentations for Wesdome, I did notice there are some auxiliary ore results. I wonder if management is pursuing any of those or intend to pursue or to develop any auxiliary resources like near the mill there. I did notice couple of locations.

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Duncan Middlemiss, Wesdome Gold Mines Ltd. - President and CEO [31]

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This is at the Kiena [asset], correct?

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Raghu Agorian, - Analyst [32]

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Yes.

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Duncan Middlemiss, Wesdome Gold Mines Ltd. - President and CEO [33]

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Yes, okay, well -- yes, as we've alluded to, we're currently doing both 10,000 meters of underground drilling on what we call auxiliary zones. So, that the former producing zone, the S50, there's a lot of opportunities, very close to mine infrastructure there. Another past producing zone called the VC zone, we're also pursuing some more definition and exploration drilling on that one.

I think right now the envisionment is that is a big mill, it's a 2000-ton per day mill. I think that we need contributions from a potential S50 or the VC zone in combination with the higher grade Kiena Deep zone in order to get a good commercial rate of production here. So, that's sort of the envisionment right now, so we're pursuing that.

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Raghu Agorian, - Analyst [34]

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And last question for me is on the Eagle exploration, I wonder what's the management plan for releasing -- I mean you may have some targets or something. Can you give us some idea what sort of plans for releasing some data in the new exploration results? Thank you.

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Duncan Middlemiss, Wesdome Gold Mines Ltd. - President and CEO [35]

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Well, we expect to have a fair and steady stream of news over the year. We really have two exploration programs, one underground where we're extending some of our known zones of mineralization. So we'll have results from that. It's very regular throughout the year. And then we also just completed a three-dimensional model of the Eagle River in the surrounding area. We're prioritizing a drill target, and we hope to start drilling here during the summer months from surface and then we would have some -- release some results to follow that. So sometime in Q3, we would start to release some of the surface driven results. So, it's going to be over the year of exploration around the Eagle River mine.

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Operator [36]

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And that concludes our last question. You may now disconnect.

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Duncan Middlemiss, Wesdome Gold Mines Ltd. - President and CEO [37]

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Great. Thanks, everybody, for joining us today.