Ann: Preliminary Production Guidance, page-4

The forecasts for Jan-Jun 2015 are US$400-450/oz cash cost and US$900-$1000 for AISC. At first glance the AISC forecast of $900-1000 looks good and I considered a trade today for a bounce BUT;
Looking further, cash cost forecasts are forecast to be higher than the $382 reported for the Sep qtr. That is a negative turn with no explanation on why (unless I missed something) and a little surprising if production of ounces is going to be up and grade is forecast to hold above 5g/t. Also new leach tanks forecast to be on line in early 2015 and grind size optimisation progressing so recovery should improve further. So why is the cash cost forecast to rise? Very strange and a negative. I’m also not confident on the AISC reporting matching actual recurring cash expenses. On my numbers for Sep qtr, AISC was over $1200/oz when cash costs were reported as $382/oz. So now cash costs are guided to rise to $400-450/oz and yet AISC is forecast at $900-1000/oz. Presumably they are not including items in AISC that I include – I think they do not include the full amount of u/g development expenditure in AISC. There is a good reason why I do include 100% of that expenditure. When I asked on two separate occasions (over several qtrs) if the current rate of development was higher than what it would be in future years, I was told no; the current rate of development would need to continue indefinitely. To me that suggests none of it should be capitalised and all of it should be in AISC or at least that is how it will affect actual free cash flow regardless of how they report it. So unfortunately this new guidance does not reassure me that free cash flow is going to improve significantly especially now with the POG lower. The Sep qtr delivered no free cash margin on a $1230 POG assumption and I don’t expect the second half will either now despite the modest increase in ounces (you can double ounces but if cash margin per ounce is still near zero, it doesn’t help!). I really do hope I’m wrong and it will be interesting to see how the market reacts to this. There is also no major improvement in production for the 2nd half. It was 40-45koz in the 1st half so the 2nd half on new guidance works out to 55koz. A decent improvement if previous guidance was not for more; is it enough to justify a re-rate? On my AISC estimates (or my estimates of free cash), IMO this new guidance does not justify a re-rate. This one is still at the mercy of POG. Without further improvement beyond the forecast period (preferably on grade moving up to at least 6.5-7g/t) then I think this company needs a POG sustainably above $1300-1400/oz. In fact half of the world’s production needs a price above US$1300/oz, not just MML. At 5g/t this company is no longer a low cost producer (IMO). They are in line with the global average and that’s not unexpected for an u/g mine of this type running at 5g/t. For me to buy I would need to be confident on $1400 gold, or $1250 gold and sustainable 6-7g/t to generate significant free cash flow.