Ann: Quarterly Report March 2015, page-20

Loki01. AISC costs have been reported since last October under new management.
Q3 results confirm progress is continuing in most areas of the mine at Co-O and mill although it may not be fast enough for some! The previous CEO, PHB, a mining engineer, left the company last August after years of the not meeting guidance and one problem after another. Geoff Davis came back out of retirement and brought in a new COO, mining engineer, Rob Gregory from early September. Rob has been looking at the issues affecting the mine with fresh eyes and is central to making recommendations to get the mine output up to match the capacity of the mill.

You and other long termers remember the 200k oz target production for Co-O from years ago when the new mill development was being planned. That was then! This is now: the 200k oz target was unrealistic and will probably never be reached, so the 200k oz/yr figure is no longer used by the company.

The theoretical maximum for the mine at Co-O/mill:
68,000 ton/mth x 3 mths/qtr x 7.2 gm/ton / 31.1 gm/oz x 95% recovery = 44.9k oz/qtr = 179k oz/yr

This will be after completion of the new Service shaft next year but for all practical purposes a more likely upper limit may be 160-175k oz/year. Completion approx 15 months from now. Then production increase to 2,700 t/d from 2,400 t/d now after L8 shaft upgrade completed in mid January.

L8 shaft is now operating with a larger capacity skip plus a double decker man cage. Production should increase in Q4 this year to approx 30k oz and next FY as a result of this L8 shaft upgrade, new payment system for the miners resulting in less overdraw from the stopes (extra waste taken from the stope wall which increased payment to the miners) and higher grades being hauled to the mill, plus other changes and efficiencies being planned underground.

Mine should be operating at 7.2 gm/t - stope plus development ore (not 5.x gm/t). Rob expects progress towards this 7.2 figure as a result of a new payment system for the miners that is becoming effective now and will be complete after 10 mths ie year end - please see Q3 report details:

"The contract remuneration system has been modified to ‘payment for volume blasted’ from previous ‘payment for tonnes drawn and trammed’. This removes the tendency for overdrawing of stopes which increased unplanned dilution, as well as providing a more reconcilable measuring system for payment and control. This system is being introduced on all new stopes developed, and benefits will be fully integrated by end of September quarter once all “old design” stopes are completed."

94% or 95% recovery is seen as the likely upper limit for recovery (94% achieved in Q3).

Mid 2016. Further benefit from completion of the new Services shaft. It will have just the skip for materials only. It will operate twice as fast as now and will be available for lifting at all times. New Service shaft will take the existing man cage so will be dedicated to men/services etc.

At the end of the day it is not all about mine output but profitability. The operation has been cash flow positive for each of the past 3 quarters, $1.9 million added in Q3 to US$15.5 million. Also, unlike most gold miners, debt is negligible, c.$10 million, reducing. Even with $1200 gold the cash generation is likely to improve a lot quarter on quarter over the next couple of years when dividend payments are expected to return. There is much more efficiency of operation of the mine to come and a much higher gold price in prospect, even if it doesn't much seem like it atm!

A lot to look forward to ......