Mark Sander - President & CEO

Ross Carden - Polygon

Thank you for calling into the replay for the Mandalay Resources Conference Call, which originally took place on May 10th, 2018 at 8

00 AM Eastern Time.

Good morning. My name is Kevin and I will be the conference facilitator today. At this time, I would like to welcome everyone to the Mandalay Resources Corporation Q1 2018 Financial Results Conference Call. Joining us today on the call is; Mark Sander, President, Chief Executive Officer and Director of Mandalay Resources. This call is scheduled for 60 minutes. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer period. [Operator Instructions] This call contains forward-looking statements, which reflects the current expectations or beliefs of the Company based on information currently available to the Company. Forward-looking statements are subject to a number of risks and uncertainties that may cause the actual results of the Company to differ materially from those discussed in the forward-looking statements. Factors that could cause actual results or events to differ materially from current expectations are disclosed under the heading, Risk Factors and elsewhere in the Company’s Annual Information Form dated March 29, 2018, available on SEDAR and the Company’s website. Thank you. Dr. Sander, you may begin your conference.

Thank you. Good morning everyone. Thanks for getting up and coming on our conference call. My role today really is to highlight for you, our first quarter results and take any questions. And thinking over the results, what excites me most is willing to return to positive cash flow that we expected in 2018. As you know 2017 and was a difficult year with the events at Cerro Bayo and have incurred in response to that a number of one-off costs that we don't expect to repeat. And in fact they haven't. So we ended the quarter with a 38% higher cash balance than we started ending the quarter, little over $23 million in cash. In terms of production Bjorkdal had about a plan to quarter, there were some operational upsets around the breaking a no gear which the, which is really heartening to me that the site recovered from that and stayed and precisely on budget. The costs were a little higher, but in terms of ounces production. And they did very well in this follows on the behavior and the response to challenge that that the site has really showed as turned the corner last year to produce the turnaround that we had in mind. They -- at Bjorkdal, we are in the midst right now of changing out our major contractor in the open pit loading and hauling. This was done for reasons of a cost control. The capacity increase, the new contractor is a more amenable to adding trucks as we need and safety. In another month or so, month or two, the same contractor, once it's bedded in loading and hauling and the open pit, they are going to be transitioning with the loading and hauling for the underground as well with the same three incentive benefits. And that is a safety improvement, at least holding costs steady; and most importantly, capacity adjustments to meet our needs. We've been trying to grow production out of both successfully, but in late last year we certainly had some issues with getting the right number of trucks from the old contractors to satisfy our increased needs for moving oil to the surface. The Bjorkdal grade control continues to function as it's supposed to and while we didn't achieve or experience a positive great surprise like we did in Q4. Certainly the baseline results we're about, right. Now, Costerfield performed, it had a bit of a light quarter in terms of production. This is because the capital development to Brunswick is a few weeks slower than we had in our budget of six months ago. The highest grade partner Brunswick is scheduled to be mine first as you'd expect and we had expected that high grade to start coming in March. And we're actually going to be developing that in Q2. We are at the bottom of the Brunswick or shoot at the moment, constructing infrastructure and getting ready to begin operating development, I think in the latest May. So we'll be seeing more coming in from Brunswick at the end of the end of Q2. The most exciting news though from Costerfield is the emergence of the Youle lode, which is down beneath the historic Costerfield mine that, was mine back in the late 1800s, early 1900s. We have achieved a series of excellent field intercepts from Youle, which we released in earliest April and we're planning a follow-up release of more results early next week. We will keep you in the loop as to what we plan there. And stay tune for AGM and Investor Updates going forward. This presages a significant mine life extension relative to just mining at Brunswick and a return to the higher grades, similar to what we were mining in Costerfield a year or two ago in which, which had about 20% higher production rate with a concomitant lower cash costs for production. In terms of financial results, we delivered a bit lower revenue than the year ago quarter. But in fact some of the higher EBITDA, this is a result of not only cost control efforts, but in fact the lack of production from Costerfield, which remains on-care maintenance, as more than offset by the combination of production and lower costs from the other mine. We narrowed our net loss probably two years ago and are spending capital and a slightly lower rate. In terms of what we see going forward, we see continued positive cash flow through the year and we are beginning to see some of the expenses around noncash or non-core assets reverse. We have a signed and received option payments on the sale of Ulu, which is post Q1, o that's not included in the Q1 ending cash balance. And we have received a positive decision from the Nunavut water board, which needs to be ratified by the Minister of INAM to return about half the bond increase if we -- or the restricted cash increase that we had to put in third quarter of last year. So that's about a CAD$5 million back. And we believe that we will be the building on the momentum we've established in the turning around of Mandalay to its historical value adding profile. And I look forward to keeping you on board with us through the journey. If there are any questions, now is the time.

Thank you. [Operator Instruction]. My first question is coming from Mike Horne. Your line is now live.

Hi. Thank you for doing the call. It's just so few questions. So on the contractor, I just want to clarify. So you, I think you said you thought you could save costs, but then when you were talking about the underground, I think you were talking more about safety and keeping costs a stable. So will you save cost from the change of contractors? And then I have follow-ups. Thanks.

The -- what precipitated that change in contractor was really the existing contractors at asked for substantial increases in rates to sign the next generation contract. So I put them out to bid and really, the new contracts will hold the line on costs relative to what the previous contractor was lobbying for. However, the new firm is a quite a bit more mature in their safety practices and in their capacity delivery. And we expect more ounces out of the ground with the new contractor relative to the two old ones put together. That makes sense?

Yeah, totally. Thank you. And that's actually a, you alluded to the next place I wanted to go is, you talked about like – I think one of the issues that investors sometimes have with the company, is reserve life and that sort of thing. And you talked about some of the things that found exciting, like the Youle lode and the underground potential worked out. So could you kind of talk about what are -- when would there be a reserve update and what are some of your hopes in terms of perhaps increasing production and preserves?

Okay. If you recall the history here, we've been mining this thing for, since 2009 and we started out with no reserves and we've developed reserves a few years in advance of meeting them all along and have been mining for nine years and have three to four years left with -- when we finish drilling out Youle there'll be another, I don't want to speculate but in another few years with that one. So the history here has been, repetitively renewed shore [ph]. And what I can say is, Youle drill intercepts suggest we'll return to high grade. When we were mining Costerfield or Cuffley lode at those kinds of grades for the same effort we were producing 60,000 or 65,000 ounces of gold and its down around 50 or 52 this year and its purely grade. We don't have any plans at the moment to increase the mining rate at Costerfield, but the grade fluctuations will – should cause an increase in production in the natural course of optimizing the mine schedule. At Björkdal we have about a 10 year life now. We have no evidence that, our drilling is any less productive than it has been in the past three years since we've owned the property. We up the drilling budget there to about a 3.4 million this year. And what we've got there is a key permit we're getting for expanding the tailings, which we expect to get a towards the end of this year in Q3 or Q4 and that actually has in it a permission to expand. They'll throughput from the current on 1.3 million tons a year to 1.7. So right now, in preparation for getting that permit, we are doing a mine optimization study to determine whether or how much to increase the low capacity and match the permit. But there is as much as roughly a 30 % Youle increase that we will be permitting for, when this permanent comes through. And what's right to do economically, I can't tell you right now. But I will be able to, towards the end of this year when the optimization study is complete.

Okay. And, last question and then I'll get back into the queue. I have more questions, but a couple of questions. I'm a relatively new shareholder so this could be a very elementary question, but why -- is there some kind of seasonality because of the weather? Why did the ounces were a -- it seems like you feel like you had a good quarter, but the ounces were a lot lower than they were in the fourth quarter. Is there seasonality there?

Well, the first quarter is always the difficult one from a snow and snow melt point of view. But really the issues, especially if you are new to the story, what happened in 2017 Q4 is that, we had a positive grade surprise where we knew in our grade model that we were going to get at least three grams a ton mill feed from it. It actually ended up being about seven. And we tune up our grade models to make sure that we're accurate in the one to three gram of ton range where 90% of our ore is, so can we can't afford to drill out all of the high grade products that we know about to determine their accurate grade. So we did get an upside grade surprise, because that is what has not been repeated. But if you look at the baseline, it's in our investor presentation that is now on the website, if you draw the trend line upwards from Q1 of 2017 where the turnaround really started, you'll see that the trend line goes right through Q1 of this year. And in average it's on-track. I think we believe we have truncated the risk of downside grade surprises with our optimization, but we'd have left hope and the upside risk of a positive grade surprises in favor of economizing on the closest space in field drilling we would need to be absolutely 100% accurate.

Okay. And, and just the last part of that question was, is there any update on Cerro Bayo, is that kind of on the shelf for the foreseeable future? And...

It is on the shelf. We have a repeatedly through last year stayed in our position that we are proceeding with permitting as fast as the procedures will allow us to restart. We do need about seven permits to restart and mine the complete life of mine plan that we have left there. And the, it's really not worth restarting on a partial set of those permits. So when we can see all seven of those in hand is when we will be able to start up, definitely talking about restart or planning a timing to share, the current permitting regime in Chile, as it is most places in the world. It takes a bit longer than you think. And there's, especially with Cerro Bayo and the flooding we experienced, there's a bit of enrolment into various constituencies in how we see reopening this safely.

Yeah. And then also, I know the name's escaping me, but I know you have a silver project. Is that farther off in the future? I believe that's in Chile?

A solar project? No, we don't have a solar project.

No, I said a silver. I'm sorry.

Silver project, yes, yes. That one is right now, we are waiting on, first of all a environmental -- it's called DEI; Declaration of Environmental Impact for continue drilling. We'd have new exploration ideas that have been germinating over the last year and a half while this permitting project has been underway. And we expect to get the permit in a couple of months, but we are also awaiting the process for transferring our existing water rights to that property for some water supply of that property cut from a source that will heavily impact and it did in haulage, which is not [indiscernible] desert to a new source where we have successfully drilled a water exploration wells last year. So those two things are the critical path. And again, it's the – our activities there are paced by the, the rate of permitting. I would say that this project needs more ounces to be truly economic and that obviously has to have successful water rights transfer to make it even technically feasible.

Okay, great. Thank you so much for your patience with my questions.

Thank you. Next question is coming from Ross Carden from Polygon. Your line is now live.

Hey guys. Thanks for the color. Just a very quick one on page five of the release you mention the -- and you mentioned earlier on the call this, the Lupin this sort of 4 million or 5 million release. I just wanted to check on this and the actual real sort of financial impact? Is that a release of cash that's currently restricted as you will see that come into your cash balance or something?

We expect the minister to sign off on this. She has another 15 days to do so. When and if she does, we will be getting that money cash back. That is basically half the CAD9 million or CAD10 million that we had to put up in September of last year to accommodate the [indiscernible] demand for additional bonding. You've gone through another round of bond hearings and what you can take from that is, there was a, , take a total cash onto restricted cash on deposit when we talked it off of about CAD35 million and that has dropped to just under 30 million in the latest round of hearings. And it could come down further. We are onsite at the moment. I'm reclaiming noncritical parts of the property and won't interfere with the restart, should a buyer want to and this is reclaiming of some of the older tailings facilities. As we reclaim we will be able to file for further bond reductions so that there's a bit of working capital involved in doing the reclamation and then getting the refund. But the intent is that there'll be within a quarter of two, it will be getting the money back to a database that reclamation.

So what'd you think the net impact is if you take the cash that gets released and so you can now report that in your cash balance on the balance sheet net of the any working capital....

If we went, if we just went straight line to complete reclamation and turn the property back over to the crown, we believe we are $10 million to $12 million over bonded and that would be a net inflow into the company as we do it and get it signed off. It would take years to complete the reclamation into seasons and nice road to do that. We are absolutely confident we can do it for about a CAD$20 million, not 34 or 35. And what we're saying is half of that is possibly coming back in Q2 if the minister or when the minister signs off. On the current in play power reduction and the other half would come back as we either make the case for further reductions or demonstrate that we're doing the reclamation for lower cost than the work we're cost in line with our plan and lower than the government could do it themselves, if they were stuck with the property. But the net effect over the reclamation project is about CAD$10 million or CAD$12 million.

Okay. That’s good to hear. That’s all the question I have had.

Thanks Ross.

We have reached the end of our question and answer session? I’d like to turn the floor back over to management for any further or closing comments.

Okay. Well thank you all again. And I appreciate the shareholders sticking with us. And I am looking forward immensely to the next three or four quarters in demonstrating that in fact Mandalay is on the road back. And we'll demonstrate that slowly and surely as we build our cash and resolve some of the issues that still are a bit unclear, getting clear on them the way forward, Cerro Bayo and the ultimate capacity to settle on for the long term. And then obviously bringing in the new higher-grade potential Youle lode body is another facet to watch. Okay, as usual if you have any questions, get back to Craig and he can reach me anywhere I am and we can get a response to the questions that you've got in the future. Thanks.

Thank you. That does conclude today's teleconference. You may disconnect your lines his time and have a wonderful day. We thank you for your participation today.