VANCOUVER Nov 13, 2015 (Thomson StreetEvents) -- Edited Transcript of Imperial Metals Corp earnings conference call or presentation Friday, November 13, 2015 at 6:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Brian Kynoch Imperial Metals Corporation - President * Andre Deepwell Imperial Metals Corporation - CFO ================================================================================ Conference Call Participants ================================================================================ * Orest Wowkodaw Scotiabank - Analyst * Craig Hutchison TD Securities - Analyst * Tom Litke Citadel Investment Group - Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good afternoon, ladies and gentlemen, and welcome to the Imperial Metals Corporation third-quarter results conference call. (Operator Instructions) This call is being recorded on Friday, November 13, 2015. I would now like to turn the conference over to your host, Brian Kynoch, President. Please go ahead. -------------------------------------------------------------------------------- Brian Kynoch, Imperial Metals Corporation - President [2] -------------------------------------------------------------------------------- Thanks, Chris. Welcome to the Imperial Metals conference call to review our third-quarter 2015 results. First, I'd like to note that our comments may contain forward-looking statements, which, by their nature are subject to risk of uncertainty, and actual results may differ materially from those expressed today. So, please have a look at our cautionary note that is attached to our news release. I'll start the call with a brief update on our major projects and then I'll have Andre go through the highlights of our financial statements. At Huckleberry, the tonnage milled and the copper produced were virtually the same as in the second quarter, 1.7 million tonnes treated and about 11.5 million pounds of copper produced. Cost control initiatives have been undertaken, including deferral of capital costs, where possible, and a reduction in the workforce at Huckleberry. The weakness in the Canadian dollar certainly helps in this regard of controlling costs. Work on optimizing a mine plan given the current copper prices is in progress and we expect to have a revised mine plan by the end of the year. In the main zone at Huckleberry, there about two more years requiring significant stripping to remove the waste and tailings in the old pit we mined in the early 2000s, and then the stripping ratio drops to much less than 1 to 1. At Mount Polley, the production there since we restarted in August has been very close to what we've targeted. And in the fourth quarter we expect to produce about 11,000 tonnes of concentrate containing about 5 million pounds of copper and 11,000 ounces of gold. The current permit we're operating under allows us to put a maximum 4 million tonnes of tailings into the Springer pit. We have been operating the plant on a one week on/one week off schedule. However, beginning late in the fourth quarter, probably near the end of this month or early December, we plan to shift to continuous operations during the particularly cold winter months. We know this will fill the Springer pit sooner, but with freezing conditions we think it's more prudent to operate the mill continuously. Permitting work on both the short-term and long-term water discharge permit continues. And to ensure that the discharge water meets all the requirements, a water treatment plant and an outfall system to deliver the treated water into Quesnel Lake at depths have been installed. We also began the work to apply to the Ministry of Energy and Mines and the Ministry of Environment to allow us to use the repaired and buttressed tailing facility at Mount Polley. With respect to Hazeltine Creek, we rock-lined the entire channel and the water is running clear, as I said last time, and the turbidity levels have continued to be normal in Quesnel Lake. We have now completed the work on the lower portion of Edney Creek and it has been returned to fish habitat. At Red Chris the production for the second quarter was 20.7 million pounds, up significantly from the 12.7 million pounds produced in the second quarter. Since the start up, the mill has had regular significant positive reconciliation. In other words, our daily reports at the end of the month, when we've matched that up with the concentrate we truck, it shows that we had produced more than our daily sheets show. So, the mill staff for the summer months had been attributing that to the inaccuracies and samplings, the two tailings streams that leave the mill. However, even after we changed the method of sampling the tailings streams twice, the positive adjustments persisted. Mine surveys and tailing surveys had indicated the mill might be underreporting throughput, so we embarked on a program to check the tonnage reported by the belt scale in the mill. The belt scale, which measures the conveyor delivering material to the SAG mill, was inspected by the manufacturer. That was the last week in October, I think, or first week in November that, that was done. And they delivered us a service report showing that the belt scale was reading approximately 10% low. So, after adjusting the throughput by the amount suggested by the manufacturer's reports, the results of the metallurgical balance, the daily sheets, very closely match those of the shift concentrate. As a result, our production statistics beginning July 1 have been revised to reflect the additional tonnage processed and a corresponding adjustment to recovery. In the third quarter 2015 the mill achieved an average throughput of 29,147 tonnes per day, not the 26,000 tonnes per day reported on October 13. As a result of the additional tonnage, metal recovery for the third quarter has been revised to 72.9% for copper and 41.9% for gold from the 81% and 44% previously reported. The revisions to the tonnage milled do not change the metal production reported. Based on the adjusted production statistics, we met our completion test in the third quarter and a notice to that effect has been submitted to our lending syndicate for approval. Mining activities at Red Chris continued in both the main and east zones with the bulk of the material coming from the main zone, almost 80% of it; the remainder coming from the east zone. We've noticed that metallurgical performance in the mill appears to be better when the mill receives a blend from each of the pits. So we're ramping up the mining operations so that we can have more consistent production of east zone ores and maintain a blend, probably something like one part east to three parts main zone ore. That plan to do that includes moving two large haul trucks and an excavator from Mount Polley, and we're right in the midst of that. Right now they're putting the excavator together and I would hope that would be running next week and followed quite quickly by two haul trucks. The plan there is to increase our mining capacity from about the 70,000 tonnes a day it is now up to about 100,000 tonnes a day. We've also made, at our last shut down, some adjustments to the flotation circuit that included the addition of putting extra launders on the rougher circuit so that + we can increase our mass pull. And we're testing a stronger flotation reagent, both being undertaken to try to increase recovery at Red Chris. We continue to minimize expenditures on all our other exploration projects. And we're, as I said, at Huckleberry already implemented cost control initiatives and we'll be going through that process at both Red Chris and Mount Polley. With those brief summaries, I'll pass it over to Andre to go through the financials and then we'll have a question period. -------------------------------------------------------------------------------- Andre Deepwell, Imperial Metals Corporation - CFO [3] -------------------------------------------------------------------------------- Thank you, Brian. Imperial recorded a net loss of CAD29.3 million in the third quarter of 2015, compared to a net loss of CAD49.2 million in the third quarter of 2014. Effective July 1, 2015, the Red Chris mine reached commercial production and we began recording operations through the statement of income, including the interest on debt, which had been previously capitalized in the preproduction stage. Income from mine operations was CAD7.6 million in the September quarter. However, this was more than offset by foreign exchange losses, interest expense, idle mine costs, and lower tax recoveries. The significant weakening of the Canadian dollar against the US dollar resulted in a CAD33 million foreign exchange loss in the quarter, partially offset by derivative gains of CAD12.8 million on the cross currency swap. The CAD49.2 million loss in the September 2014 quarter is due primarily to the CAD67.4 million provision, which is CAD43.8 million after tax, for the Mount Polley tailings dam breach, as well as foreign exchange losses on the Company's US-denominated debt. The Company recorded a CAD2 million gain on gold derivatives for this quarter, versus gains of CAD3.1 million on copper and gold derivatives in the same quarter last year. The Company has no derivative instruments for copper at September 30, or today, but at September 30 we had hedged 24,300 ounces of gold for the balance of 2015, the min/max zero cost collars. With gold at about $1,100 per ounce, these hedges will generate about Canadian CAD2.8 million in the fourth quarter of 2015. The Company recorded CAD800,000 as its share of Huckleberry's loss compared to equity income of about CAD1.8 million in the same period last year. Huckleberry had the same number of shipments of concentrate in both quarters. The lower net income reflects reduced operating margins as a result of lower copper prices. Imperial's capital expenditures were CAD24.3 million in the current quarter, down from CAD93.1 million in the 2014 quarter. The 2014 quarter included capitalized interest of CAD11.2 million when construction of Red Chris was still in progress. The 2015 additions at Red Chris are primarily for the tailings dam and adjustments for preproduction revenues and expenses. In addition, the Company incurred about CAD2 million in capital expenditures at Mount Polley, primarily related to water management. The Company reports four non-IFRS measures: adjusted net income, adjusted EBITDA, cash flow, and cost per pound of copper produced. The adjusted net loss, which removes nonrecurring and unrealized items, was CAD9.4 million in the 2015 quarter, primarily as a result of the interest expense in excess of income from mine operations. Adjusted EBITDA was CAD13.9 million in the current quarter compared to CAD9.9 million in the 2014 quarter, as income from mine operations from Red Chris is beginning to have a positive effect on adjusted EBITDA. Cash flow was a positive CAD15.8 million in the quarter, compared to a negative cash flow of CAD59.1 million in the 2014 quarter. The 2014 quarter included the provision for rehabilitation of the Mount Polley tailings dam. The cash cost per pound of copper produced is now calculated for the Company's three mines, as Red Chris commenced commercial production in the current quarter and the Mount Polley mine restarted on a limited basis. Cash costs per pound of copper produced in the September, 2015, quarter were $1.58 per pound for the Red Chris mine, $2.40 per pound for the Mount Polley mine, and $1.77 per pound for the Huckleberry mine. In August, the Company completed three financings that raised gross proceeds of CAD80 million. These were private placement of shares for CAD6 million in an oversubscribed rights offering that raised CAD44 million and a CAD30 million convertible debenture financing. CAD30million of these funds repaid the short-term loan facility that the Company received in May 2015. At September 30 the Company had cash of CAD7.9 million. The funds from the financings, projected cash flow from the Red Chris and Mount Polley mines, and other sources of financing, are expected to be sufficient to allow the Company to meet its obligations in the normal course, inclusive of debt servicing costs and principal repayments. Other than principal repayments of about CAD1 million per month on equipment loans, the Company has no long-term debt coming due until October 1, 2016, when the senior credit facility matures. The financial covenants are not applicable on the senior credit facility, until the quarter ending March 31, 2016. Back to you, Brian. -------------------------------------------------------------------------------- Brian Kynoch, Imperial Metals Corporation - President [4] -------------------------------------------------------------------------------- Okay. Then we'll start the question period. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Orest Wowkodaw, Scotiabank. -------------------------------------------------------------------------------- Orest Wowkodaw, Scotiabank - Analyst [2] -------------------------------------------------------------------------------- Hi, good morning. A couple of questions. First of all, just on the balance sheet, in regards to the covenant that will start to be applicable as of the end of the first quarter of 2016, can you give us what that covenant is? I assume it's something like a net debt to EBITDA covenant on a trailing basis -- or what those threshold is, please? -------------------------------------------------------------------------------- Andre Deepwell, Imperial Metals Corporation - CFO [3] -------------------------------------------------------------------------------- There's basically three covenants. One is a fixed charge coverage ratio which is EBITDA compared to your interest expense and mandatory principal payments. The second is a total debt to EBITDA ratio. And then the third is minimum tangible net worth which essentially is your retained earnings and your share capital. The fixed charge coverage ratio in the first two quarters -- that is, in March and June of 2016 -- needs to be a minimum of 1.25 and thereafter 1.5. In terms of the total debt to EBITDA, the maximum it can be for the first two quarters is 4 to 1 and after that 3.5 to 1. -------------------------------------------------------------------------------- Orest Wowkodaw, Scotiabank - Analyst [4] -------------------------------------------------------------------------------- And the third covenant? -------------------------------------------------------------------------------- Andre Deepwell, Imperial Metals Corporation - CFO [5] -------------------------------------------------------------------------------- Is the minimum tangible net worth which needs to be about CAD340 million starting at December 31 of 2015. But that will depend on what the actual numbers at December 31. So, that's the estimate at this point. -------------------------------------------------------------------------------- Orest Wowkodaw, Scotiabank - Analyst [6] -------------------------------------------------------------------------------- Okay. And do all three only apply to the CAD200 million revolver, or are there any other debt facilities this applies to? -------------------------------------------------------------------------------- Andre Deepwell, Imperial Metals Corporation - CFO [7] -------------------------------------------------------------------------------- It only applies to that, except I believe that the second lien facility essentially mirrors the senior credit facility, so it applies to that essentially also. -------------------------------------------------------------------------------- Orest Wowkodaw, Scotiabank - Analyst [8] -------------------------------------------------------------------------------- Is that the junior credit facility you are referring to? -------------------------------------------------------------------------------- Andre Deepwell, Imperial Metals Corporation - CFO [9] -------------------------------------------------------------------------------- No that's the additional CAD50 million secured lien facility. There are no covenants on the junior credit facility, the CAD75 million. -------------------------------------------------------------------------------- Orest Wowkodaw, Scotiabank - Analyst [10] -------------------------------------------------------------------------------- Okay, that's great. And then just changing gears to the operations, in regards to Mount Polley, if you're advancing the run rate going into winter, should we assume then that the operation will essentially shut down at the end of winter and be put back on current maintenance until you get permits for the permanent tailings? -------------------------------------------------------------------------------- Brian Kynoch, Imperial Metals Corporation - President [11] -------------------------------------------------------------------------------- That should take us to April or May at the rates we're planning to go. And then we're hopeful by then that we'll have permission to use the repaired tailings facility. So, it's our plan to try to go right into full operations using the repaired tailings facility, say, in May or June of next year. -------------------------------------------------------------------------------- Orest Wowkodaw, Scotiabank - Analyst [12] -------------------------------------------------------------------------------- Okay. Does that imply, then, you plan to run below 100% through winter? -------------------------------------------------------------------------------- Brian Kynoch, Imperial Metals Corporation - President [13] -------------------------------------------------------------------------------- Remember at 0.5% we could have ran all the way to August next year, though during the winter months, let's say we go December through February at full, then by about April or May the Springer pit would be full rather than August. -------------------------------------------------------------------------------- Orest Wowkodaw, Scotiabank - Analyst [14] -------------------------------------------------------------------------------- Okay, so it will be 100%. -------------------------------------------------------------------------------- Brian Kynoch, Imperial Metals Corporation - President [15] -------------------------------------------------------------------------------- And we'll need to have permission to use our repaired tailings facility by the time we have the pit up to its capacity. -------------------------------------------------------------------------------- Orest Wowkodaw, Scotiabank - Analyst [16] -------------------------------------------------------------------------------- Okay. Any updated timeline on when you would expect a permit there? -------------------------------------------------------------------------------- Brian Kynoch, Imperial Metals Corporation - President [17] -------------------------------------------------------------------------------- Well, we need it by then. We're working hard to have it so that it will be seamless and we won't have to shut down. -------------------------------------------------------------------------------- Orest Wowkodaw, Scotiabank - Analyst [18] -------------------------------------------------------------------------------- Okay. And then just finally on Polley, with cash costs at $2.40 a pound here, and realizing it's a partial restart quarter, is there a point where it's just not worth running this thing in the current copper price environment? -------------------------------------------------------------------------------- Brian Kynoch, Imperial Metals Corporation - President [19] -------------------------------------------------------------------------------- Probably. Although I would hope that in our next quarter that we're -- we didn't have a full quarter, and it was the very first quarter of restarting, so I would expect the next quarter to be better than that quarter But you're right, basically at the end of the day, yes, you have to get where you can run it 100%, and that's what we're pushing hard to get a permit to do. -------------------------------------------------------------------------------- Orest Wowkodaw, Scotiabank - Analyst [20] -------------------------------------------------------------------------------- Okay. So, do you think it's reasonable to assume costs back below $2 in the next quarter? -------------------------------------------------------------------------------- Brian Kynoch, Imperial Metals Corporation - President [21] -------------------------------------------------------------------------------- Yes, I think we can get them below $2. Remember, Mount Polley gold is a significant part of the revenue stream there, especially gold in Canadian dollars is not a bad thing to be making right now. -------------------------------------------------------------------------------- Orest Wowkodaw, Scotiabank - Analyst [22] -------------------------------------------------------------------------------- Okay, thanks a lot, Brian. -------------------------------------------------------------------------------- Operator [23] -------------------------------------------------------------------------------- (Operator Instructions) Craig Hutchison, TD Securities. -------------------------------------------------------------------------------- Craig Hutchison, TD Securities - Analyst [24] -------------------------------------------------------------------------------- Good afternoon, guys, good morning. Could you describe a little bit more the issues you are having with the metallurgical recoveries, the main zone versus the east zone? My understanding is they should be quite similar based on the tech report. Is it issues with oxidation or what have you? And have you seen improvements since you've installed the launders? -------------------------------------------------------------------------------- Brian Kynoch, Imperial Metals Corporation - President [25] -------------------------------------------------------------------------------- I would say it's a bit early to decide whether -- we've certainly seen improvements in mass pull but the launders were installed about ten days ago so we haven't had a lot of time with that. But we certainly see we can pull more on the rougher stage. What I would say that we know about our recoveries is the majority of it we're losing in the rougher stage. That's why the additional launders. And I would say we also know that the east zone ores are better metallurgically than the main zone ores. That's the other thing, was reagant. In the rougher recoveries a lot of it is in the course fraction. That's the thing I mentioned about doing some work of using stronger flotation reagents to be able to pull more and larger particles than the rougher float cell. -------------------------------------------------------------------------------- Craig Hutchison, TD Securities - Analyst [26] -------------------------------------------------------------------------------- Okay, thanks. And maybe just one question in terms of liquidity. Am I correct in assuming you have about CAD50 million remaining on your lines of credit? Is that correct? -------------------------------------------------------------------------------- Andre Deepwell, Imperial Metals Corporation - CFO [27] -------------------------------------------------------------------------------- No, it is a bit less than that's. It's about CAD10 million or CAD15 million at the present time on the two, the senior credit facility and the second lien facility. -------------------------------------------------------------------------------- Craig Hutchison, TD Securities - Analyst [28] -------------------------------------------------------------------------------- Okay. Because there's like CAD30 million, I think it's for future reclamation. Is that correct? -------------------------------------------------------------------------------- Andre Deepwell, Imperial Metals Corporation - CFO [29] -------------------------------------------------------------------------------- For the letters of credit for the reclamation bonds. -------------------------------------------------------------------------------- Craig Hutchison, TD Securities - Analyst [30] -------------------------------------------------------------------------------- Okay, so that's not available. -------------------------------------------------------------------------------- Andre Deepwell, Imperial Metals Corporation - CFO [31] -------------------------------------------------------------------------------- It's taken out of there. -------------------------------------------------------------------------------- Craig Hutchison, TD Securities - Analyst [32] -------------------------------------------------------------------------------- Okay, great, thank you. -------------------------------------------------------------------------------- Operator [33] -------------------------------------------------------------------------------- [Tom Litke, Citadel]. -------------------------------------------------------------------------------- Tom Litke, Citadel Investment Group - Analyst [34] -------------------------------------------------------------------------------- Good afternoon, thank you for taking the question. I just wondered if you could give your perspective, since we're not hedged on copper, 2016, with regard to the covenants and cash flow, and making those covenants and making our payments and interest and such. You seem to have a great deal of confidence and I just wondered if you can clarify what ace in the hole we might have in case copper prices continue to go down. -------------------------------------------------------------------------------- Brian Kynoch, Imperial Metals Corporation - President [35] -------------------------------------------------------------------------------- I think a major part of that, the moving of the two haul trucks and the excavator from Mount Polley is part of that plan to be able to do that. With that extra capacity is the capacity to move an extra 30,000 tonnes a day. That will enable us next year to increase our cut-off grade and deliver higher grades to the mill. And not only higher grades, but more of the east zone ores which, as I just mentioned, have been giving us better metallurgical performance. That's one aspect of the confidence, we're going to try to make more copper and gold next year at Red Chris. And then, secondly, Huckleberry has had success and Mount Polley and Red Chris are actually getting some success in reducing their operating costs, partially because of the weaker Canadian dollar, but also things like grinding balls are going down in price as steel and coal prices go down. So, I'd say it is a two-pronged approach -- one, try to maximize the amount of copper and gold we can make and at the same time try to control our costs. -------------------------------------------------------------------------------- Tom Litke, Citadel Investment Group - Analyst [36] -------------------------------------------------------------------------------- So, do you feel we have a margin of error? -------------------------------------------------------------------------------- Brian Kynoch, Imperial Metals Corporation - President [37] -------------------------------------------------------------------------------- Yes. I wouldn't want copper prices to go much lower than they are now, but I think we have a margin of error at -- what is the copper price today? The price is about $2.20. We've probably got some margin, but I would say we are getting close if it continues to drop. -------------------------------------------------------------------------------- Tom Litke, Citadel Investment Group - Analyst [38] -------------------------------------------------------------------------------- Would that bring about the idea of maybe hedging? -------------------------------------------------------------------------------- Brian Kynoch, Imperial Metals Corporation - President [39] -------------------------------------------------------------------------------- It doesn't seem like the right time to hedge to me. -------------------------------------------------------------------------------- Tom Litke, Citadel Investment Group - Analyst [40] -------------------------------------------------------------------------------- I didn't mean necessarily full production hedge, but something to have some offset. It's just a thought. You know more than I do. -------------------------------------------------------------------------------- Brian Kynoch, Imperial Metals Corporation - President [41] -------------------------------------------------------------------------------- I would say especially at Huckleberry we're looking at things like that, maybe hedging as soon as we make it through the smelters. It's really just selling it as soon as you make it because a lot of these agreements we're actually being paid on the price three months after we deliver it. Maybe do something so that we get the price on delivery so we don't have that risk. And maybe even some other form of hedging. But the first mine I think we would do it on is Huckleberry because when you add it all in it's really just copper, it doesn't have the gold credits to help it, and it really needs copper price to be right for it to go. -------------------------------------------------------------------------------- Tom Litke, Citadel Investment Group - Analyst [42] -------------------------------------------------------------------------------- Okay, thank you. -------------------------------------------------------------------------------- Operator [43] -------------------------------------------------------------------------------- Orest Wowkodaw, Scotiabank. -------------------------------------------------------------------------------- Orest Wowkodaw, Scotiabank - Analyst [44] -------------------------------------------------------------------------------- Hi. Thanks for taking my follow up. Just another question there about the debt covenant. In the total debt to EBITDA, is that a trailing 12-month EBITDA or is that just to start building as a Q1 2016? -------------------------------------------------------------------------------- Andre Deepwell, Imperial Metals Corporation - CFO [45] -------------------------------------------------------------------------------- It just starts in Q1 2016. And n the second quarter it's two quarters worth and then third quarter is three quarters worth, until you get to a year and then it's always just a year. -------------------------------------------------------------------------------- Orest Wowkodaw, Scotiabank - Analyst [46] -------------------------------------------------------------------------------- Okay. And in terms of your estimation of that covenant, Andre, do have a sense of what copper price you need to be on-side with that covenant next year? -------------------------------------------------------------------------------- Brian Kynoch, Imperial Metals Corporation - President [47] -------------------------------------------------------------------------------- I am going to answer that, Orest, because Andre is bugging me. We are right in the midst of giving him a mine plan for next year and part of it is bringing this other equipment. So, we're going to revise the mine plan with this additional equipment. I think he's going to need the mine plan for him to be able to answer your question. -------------------------------------------------------------------------------- Orest Wowkodaw, Scotiabank - Analyst [48] -------------------------------------------------------------------------------- Okay. I realize it's budget season but any ideas on where capital could be next year from a sustaining perspective overall? -------------------------------------------------------------------------------- Brian Kynoch, Imperial Metals Corporation - President [49] -------------------------------------------------------------------------------- I think the tailings dam at Red Chris did cost us more money this year than we'd budgeted. If you read in the quarter there, we do have to start another dam at the south end of South Dam next year. So I don't know, we would -- again, we're in the middle of it but I would say probably CAD25 million or CAD30 million next year on tailings dam at Red Chris. -------------------------------------------------------------------------------- Orest Wowkodaw, Scotiabank - Analyst [50] -------------------------------------------------------------------------------- And the maybe like another similar amount for sustaining everywhere else? -------------------------------------------------------------------------------- Brian Kynoch, Imperial Metals Corporation - President [51] -------------------------------------------------------------------------------- It should be less than that for sustaining. We're in pretty good shape in terms of equipment and stuff there. -------------------------------------------------------------------------------- Orest Wowkodaw, Scotiabank - Analyst [52] -------------------------------------------------------------------------------- Okay. Thanks, guys. -------------------------------------------------------------------------------- Operator [53] -------------------------------------------------------------------------------- Thank you. There are no further questions at this time. Please proceed. -------------------------------------------------------------------------------- Brian Kynoch, Imperial Metals Corporation - President [54] -------------------------------------------------------------------------------- Okay, then, if we're done for questions we'll end this call. Thank you so much. -------------------------------------------------------------------------------- Operator [55] -------------------------------------------------------------------------------- Thank you. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.
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