Mr. Ernest Mast reports
PRIMERO REPORTS FIRST QUARTER 2016 FINANCIAL RESULTS; SAN DIMAS PRODUCTION RATES RETURNED TO PLAN IN APRIL
Primero Mining Corp. has released its financial results for the first quarter ended March 31, 2016 (all amounts are in U.S. dollars).
Highlights:
- Creating and sustaining a safety-first culture: As reported on April 18, 2016, Primero's principal focus during the first quarter of 2016 was to create and sustain a safety-first culture at its operations. As a result of the significant efforts made by employees and management at all levels, Primero is pleased to report that the San Dimas mine achieved no reportable safety incidents during the first quarter while also returning the mine to production levels of 2,500 tonnes per day.
- Earnings impacted by temporary production delay: First quarter earnings were directly impacted by changes to the mining sequence at San Dimas to include the implementation of enhanced ground support standards. The company realized a net loss of $13.2-million (eight cents per share) and adjusted net loss
of $7.8-million (five cents per share) in Q1 2016. The company generated negative operating cash flow before working capital changes during the first quarter of $8.5-million (five cents per share), which included $15.8-million in cash tax payments.
- Convertible debentures repaid in cash: Primero repaid in full the $48-million due on its 6.5-per-cent convertible debentures on their maturity date of March 31, 2016. As at March 31, 2016, the company had total liquidity position of $47.1-million, including $22.1-million in cash.
- Mexican tax update: The company has filed procedural and substantive responses to the legal claim against its advance pricing agreement (APA) with the Mexican tax authorities (SAT), received in February, 2016. The legal claim initiated does not identify any different basis for paying taxes, nor have any tax reassessments been received from the SAT. The company continues to pay taxes in a manner consistent with the APA on the basis that the applicable facts and laws have not changed.
- Mine production on track to achieve revised guidance: The company is pleased to report that in April both the San Dimas and Black Fox mines achieved their targeted production rates in line with the updated 2016 production guidance of between 230,000 and 250,000 gold-equivalent ounces(1)
at all-in sustaining costs
of between $975 and $1,025 per gold ounce.
- Mineral resources increased beyond depletion: Primero announced on March 16, 2016, that it had successfully increased total mineral resources across its assets in 2015, with total measured and indicated mineral resources as of Dec. 31, 2015, of 3.1 million ounces of gold plus 88.3 million ounces of silver in addition to total inferred mineral resources of 1.2 million ounces of gold and 77.1 million ounces of silver.
- Froome zone demonstrates consistency of mineralization: Recent drilling continues to delineate the highly prospective Froome zone, located approximately 800 metres west of the Black Fox mine. Mineralization continues to demonstrate consistency over long intervals with significant gold mineralization, and Primero expects to be in a position to make a production decision on the Froome zone in second quarter 2016. Highlights from recent drilling include 6.1 grams per tonne gold over 43.7 metres true width (16PR-G103), 6.2 g/t gold over 37.9 metres true width (16PR-G109) and five g/t gold
over 43.7 metres true width (16PR-G102).
"During our first quarter, we successfully implemented improved ground control procedures across our vast San Dimas mine," stated Ernest Mast, president and chief executive officer. "I feel a renewed sense of optimism as we enter the second quarter. On all-levels, we are pulling together as a stronger Primero team to achieve our corporate objectives, and through April we have made significant advances towards attaining these goals. The San Dimas mine successfully achieved average production rates in line with the mill's 2,500-tonne-per-day nameplate capacity. Black Fox made significant advances in developing the Deep Central zone ahead of schedule, began mining the recently identified 520-metre level in the Central zone and completed infill drilling at the Froome deposit. I have utmost confidence in the Primero team to achieve its objectives, and I see us at an inflection point for the company -- now aligned for improved production and strong returns through the remainder of 2016 and beyond."
Creating and sustaining a safety-first culture
Primero's principal focus during the first quarter of 2016 was to create and sustain a safety-first culture at its operations. As a result of the significant efforts made by employees and management at all levels, Primero is pleased to report that the San Dimas mine achieved no reportable safety incidents during the first quarter.
As a testament to Primero's continued commitment to sustainable economic, social and environmental operations in all areas of corporate life, including business ethics, employee health and safety, involvement with the community, and preservation of the environment, in March, 2016, for the fifth consecutive year, Primero was awarded the empresa socialmente responsable, or socially responsible company designation. This prestigious award, from El Centro Mexicano para la Filantropia (CEMEFI), the Mexican Centre for Philanthropy, is the result of a thorough independent assessment of Primero's corporate and social responsibility framework.
Production and earnings impacted by temporary production delay
As reported on April 18, 2016, Primero's production in Q1 2016 was impacted by the deliberate focus on increased worker safety and the introduction of enhanced ground support standards at the San Dimas mine, leading to combined production of 36,158 gold-equivalent ounces during the first quarter of 2016, 41 per cent lower than in Q1 2015. All-in sustaining costs (AISC) averaged $1,555 per gold ounce during the quarter and total cash costs
averaged $944 per gold-equivalent ounce.
Given the reduced production levels, Primero generated $50.5-million of revenue in Q1 2016, 31 per cent lower than in Q1 2015 as a result selling 29 per cent less gold-equivalent ounces at a 3-per-cent-lower average realized gold price. In Q1 2016, the company sold 38,781 ounces of gold at an average realized price of $1,156 per ounce and 1.35 million ounces of silver at an average realized price of $4.24 per ounce. Revenue in Q1 2015 totalled $73.3-million from selling 55,037 ounces of gold at an average realized price of $1,186 per ounce and 1.9 million ounces of silver at an average realized price of $4.20 per ounce.
Silver produced at San Dimas is subject to a silver purchase agreement(2)
and as a result 1.35 million ounces of silver were sold to Silver Wheaton (Caymans) Ltd. at a fixed price of $4.24 per ounce during the quarter. As of March 31, 2016, the company has delivered 4.2 million ounces of silver under the San Dimas silver purchase agreement's six-million-ounce annual contract year threshold (which runs from Aug. 6
to the following Aug. 5), after which the company will begin selling 50 per cent of the silver produced at San Dimas at spot market prices until Aug. 5, 2016, when the annual threshold is reset. Silver ounces sold in Q1 2016 were higher than silver produced due to timing of shipments. Gold produced at Black Fox is subject to a gold purchase agreement(3) and as a result 1,336 ounces were sold to Sandstorm Gold Ltd. at a fixed price of $521 per ounce in Q1 2016.
The company incurred a net loss of $13.2-million (eight cents per share) in Q1 2016 compared with net income of $3.6-million (two cents per share) for the first quarter of 2015. Adjusted loss for Q1 2016 was $7.8-million (five cents per share) compared with adjusted income of $1.1-million (one cent per share) in Q1 2015. Adjusted loss in 2016 primarily excludes the impact of foreign exchange rate changes on deferred tax balances and an adjustment to remove the normalization of inventory costs at San Dimas, net of taxes.
Primero generated negative operating cash flow before working capital changes during in Q1 2016 of $8.5-million (five cents per share), compared with positive operating cash flow of $18.8-million (12 cents per share) in Q1 2015. Q1 2016 operating cash flow was affected by $15.8-million in cash payments for income taxes in Mexico, the annual payment of mining royalty taxes, a final payment for filing its 2015 tax return and 2016 initial tax instalments.
Liquidity expected to improve by end of 2016
The company's total liquidity position at March 31, 2016, totalled $47.1-million, comprising $22.1-million in cash and $25.0-million available under its line of credit. During the quarter, a number of events significantly affected total liquidity which included the drawdown of $50.0-million from the line of credit to repay the 6.5-per-cent convertible debentures that matured on March 31, 2016, and $15.8-million in cash payments for income taxes in Mexico, the annual payment of mining royalty taxes, a final payment for filing its 2015 tax return and 2016 initial tax instalments.
Primero expects to improve its liquidity through positive cash flows from operations and will explore other financing opportunities along with initiating the renewal of its revolving credit facility, which matures in May, 2017.
Mexican tax update
The company has filed procedural and substantive responses to the legal claim against its advance pricing agreement (APA) with the Mexican tax authorities (SAT). The procedural response is a challenge against the admission of the SAT's claim. The substantive response contains the company's response to the SAT's claim. The APA was obtained to confirm that the company should calculate taxes on silver produced at the San Dimas mine based on the price realized by the company. The legal claim initiated does not identify any different basis for paying taxes, nor have any tax reassessments been received from the SAT. The company continues to pay taxes in a manner consistent with the APA on the basis that the applicable facts and laws have not changed.
The company believes that it is entitled to rely on the APA which is legally binding in respect of the company's 2010 through 2014 taxation years. The company obtained the ruling transparently and in good faith. Primero believes the APA should not be the subject of challenge by a government administration installed upon the change of government after the APA was duly issued. Primero has and will continue to invest millions of dollars in the local Mexican economy and intends to continue legal action aimed at ensuring that the Mexican tax authority respects the rule of law.
In connection with the company's procedural challenge to the SAT's legal claim, the Mexican Federal Court recently issued an order mandating that no decision may be issued in connection with the substantive claim until the procedural challenge against the admission of SAT's claim is decided on. This procedural order is being appealed by the SAT, and the company does not expect the order to delay the resolution of the substance of the case.
The company has also taken other measures to defend its interests, including submitting a complaint to Procuraduria de la Defensa del Contribuyente (PRODECON, or the Mexican tax ombudsman) regarding violations of Primero's rights by the SAT.
Primero also recently obtained a ruling nullifying the Mexican customs authority's acts that suspended the company from the import and export registries in 2015. While this order is subject to appeal, Primero believes this order recognizes Primero's compliance with Mexican laws in these matters.
The company will continue to vigorously defend the validity of the APA and the correctness of its tax-filing position.
Production on track to achieve revised guidance
The company is pleased to report that in April both the San Dimas and Black Fox mines achieved their targeted production rates in line with the revised 2016 production guidance of between 230,000 and 250,000 gold-equivalent ounces at all-in sustaining costs between $975 and $1,025 per gold ounce.
2016 PRODUCTION GUIDANCE
2016 revised guidance
Actual
San Dimas Black Fox Consolidated 2015
Attributable gold
-equivalent production
(ounces) 160,000-170,000 70,000-80,000 230,000-250,000 259,474
Gold production
(ounces) 120,000-130,000 70,000-80,000 190,000-210,000 221,060
Silver production
(million ounces) 7.5-8.5 N/a 7.5-8.5 8.30
Total cash costs (per
gold-equivalent ounce) $600-$650 $750-$800 $650-$700 $637
AISCs (per gold ounce) $775-$825 $1,000-$1,050 $975-$1,025 $972
Capital expenditures ($M) $51.4 $23.6 $77.3 $93.3
Material assumptions used to forecast total cash costs for 2016 include: an average gold price of $1,078 per ounce (bases on actual gold prices received for Q1 2016 and $1,050 per ounce for the remainder of the year); an average silver price of $5.00 per ounce (calculated using the silver purchase agreement contract price of $4.26 per ounce and assuming excess silver beyond contract requirements is sold at an average silver price of $14 per ounce); and foreign exchange rates of $1.35 and 16 Mexican pesos to the U.S. dollar.
San Dimas production rates returned to plan
As previously disclosed, first quarter production at San Dimas was impacted by changes to the mining sequence to include the implementation of enhanced ground support procedures and the condition that all employees will never work under unsupported ground. The implementation process was a monumental task given the significant size of the San Dimas mine and resulted in weaker-than-expected performance in Q1 2016. However, as of April, the company has been successful in re-establishing mining operations in line with the mill's current 2,500-tonne-per-day nameplate capacity, with ground support implementations completed.
Primero also completed a revised 2016 operating plan for the San Dimas mine which includes the recent changes to the mining sequence, and the addition of rock bolting and screening. Based on an assessment of the new cycle times and the productivity of mining crews, Primero has determined not to advance the 3,000 tpd mill expansion in 2016, resulting in a $5-million reduction from this year's planned capital expenditures. However, construction will continue to complete the expanded crushing circuit which will help alleviate backlogs experienced during the rainy season.
Based on the updated plan, the mine will focus on achieving increased head grades through the removal of low-grade, incremental cut-and-fill tonnes and the reduction of mining dilution. Following a detailed evaluation of the mine's performance under the new production regime, Primero will assess the specific benefits of increasing milling capacity in 2017.
Black Fox positioned for breakthrough with transition to Deep Central zone
At Black Fox, first quarter production was affected by the limited availability and deferrals of high-grade ore from the upper, remnant areas of the underground mine. Significant development progress was made to access the mine's Deep Central zone, an area of high-quality ore that has no remnant mining. Drifting on the 640-metre level intersected initial ore in the Deep Central zone in April, approximately one month ahead of schedule, and Primero is now working to complete two crosscuts. Development has also started on the 660-metre level ahead of initial stoping activities.
Daily underground production rates are expected to increase through the remainder of 2016, principally from a ramp-up in contribution of ore from the Deep Central zone but also from a large mineralized zone accessed in April on the 520 m level in the mine's Central zone. Newly discovered areas on the 540 and 560 m levels were successfully delineated and will be included in the 2016 mine plan. As a result, Black Fox's production is expected to increase to approximately 850 tpd in the fourth quarter of 2016.
Primero's efforts also remain focused on growing the mine's mineral resources, with the mine currently working to complete a 200 m extension of the 520 m level exploration drift which will allow for better drill angles to test mineralization located to the west of the Deep Central zone, and to depths of 1,000 m and below. Initial drill results from this program are expected in Q3 2016.
The company has also commenced an internal economic evaluation of the Black Fox Froome zone. As reported on March 16, 2016, Primero has outlined an initial mineral resource estimate for this highly prospective zone located approximately 800 m west of the Black Fox mine. The initial estimate only included drilling up to Feb. 17, 2016, and contained an indicated mineral resource of 43,000 ounces of gold and an inferred mineral resource of 129,000 ounces of gold, with all currently defined resources at less than 250 m depth. Primero continues to expand the Froome zone by drilling for mineralized extensions both laterally and at depth. The company completed approximately 21,000 m of drilling in the first quarter, drilling the orebody to 12.5 m centres giving the company a block model suitable to develop a mine plan for the internal economic evaluation. A production decision is expected during second quarter 2016.
An additional 23,000 metres of drilling are planned at the Froome zone in 2016 focused on expanding the orebody and drilling other targets on the company's concessions. Highlights from recent drilling include 6.1 g/t gold over 43.7 metres true width
(16PR-G103), 6.2 g/t gold over 37.9 metres true width (16PR-G109), five g/t gold over 43.7 metres true width (16PR-G102), 6.5 g/t gold over 24.8 metres true width (16PR-G083), 6.5 g/t gold
over 21.8 metres true width (16PR-G073), 6.6 g/t gold over 21.1 metres true width (16PR-G104) and 6.1 g/t gold over 20.4 metres true width (16PR-G115).
Highlighted exploration drilling results from the Froome zone are included in the table.
FROOME ZONE -- RECENT HIGHLIGHTED DRILLING RESULTS
Hole From To Core length True width Gold grade
(m) (m) (m) (m) (g/t)
16PR-G073 139.0 169.1 30.1 21.8 6.5
including 144.0 152.0 8.0 5.8 10.6
16PR-G083 155.4 191.5 36.1 24.8 6.5
including 168.0 176.0 8.0 5.5 11.6
and 194.3 237.0 42.7 29.3 4.1
16PR-G084 147.8 171.6 23.8 17.2 7.5
including 152.0 158.0 6.0 4.3 11.9
16PR-G091 161.2 180.5 19.3 13.4 8.7
and 183.3 190.0 6.7 4.7 10.4
and 197.0 221.2 24.2 16.8 4.8
16PR-G092 150.4 168.0 17.7 13.3 8.1
and 172.0 196.0 24.0 18.1 5.4
16PR-G102 210.2 272.8 62.5 43.7 5.0
16PR-G103 182.5 241.3 58.8 43.7 6.1
including 205.9 212.3 6.4 4.8 13.9
and 247.5 255.7 8.2 6.1 5.5
16PR-G104 168.2 199.0 30.8 21.1 6.6
and 201.1 236.8 35.7 24.4 4.7
16PR-G108 191.4 220.0 28.7 20.8 6.3
and 224.0 239.7 15.7 11.4 5.7
and 243.8 257.0 13.3 9.6 5.3
16PR-G109 180.2 231.0 50.8 37.9 6.2
including 201.0 211.3 10.3 7.7 10.6
16PR-G115 184.4 213.0 28.6 20.4 6.1
including 193.0 198.0 5.0 3.6 14.8
16PR-G117 161.0 211.0 50.0 34.5 4.7
16PR-G119 147.0 175.2 28.2 20.9 4.6
and 178.7 198.0 19.3 14.3 6.0
16PR-G122(1) 125.9 177.7 51.9 36.1 4.1
(1) Six assays pending.Black Fox complex drilling was conducted by Norex Drilling supervised by Primero's exploration team. David Laudrum, PGeo, senior resource manager for Primero, has reviewed the technical exploration information in this news release as the qualified person for the company for the purposes of National Instrument 43-101. All samples are one-half core and analyses reported herein were performed by the independent laboratories Polymet Labs which is ISO 9001:2000 certified, Accurassay Laboratories, which is ISO/IEC 17025 certified, ALS Laboratories, which is ISO 9001/IEC17025 certified, SGS Canada Laboratories, which is ISO9001/IEC17025 certified, Swastika Laboratories, which is ISO 17025 certified. Primero's quality control program includes systematic insertion of blanks, standard reference material and duplicates to ensure laboratory accuracy.
Conference call and webcast details
The company's senior management will host a conference call today, Wednesday, May 4, 2016, at
9 a.m. ET to discuss first quarter 2016 financial results.
Participants may join the call by dialling North America toll-free 1-888-789-9572 or 416-340-2217 for calls outside Canada and the United States, and entering the participant passcode 3894515.
A live and archived webcast of the conference call will also be available at the company's website under the news and events section.
A recorded playback of the first quarter 2016 results call will be available until Aug. 1, 2016, by dialling 1-800-408-3053 or 905-694-9451 and entering the callback passcode 2246322.
This release should be read in conjunction with Primero's first quarter 2016 financial statements and mangement's discussion and analysis report on the company's website in the financial reports section under investors, or on SEDAR and EDGAR.
(1) Gold-equivalent ounces include silver ounces produced and converted to a gold-equivalent based on a ratio of the average commodity prices realized for each period. The ratio for the first quarter 2016 was 278 to 1 based on the average realized prices of $1,178 per ounce gold and $4.24 per ounce silver.
(2) According to the silver purchase agreement between the company and Silver Wheaton, until Aug. 6, 2014, Primero delivered to Silver Wheaton a per-annum amount equal to the first 3.5 million ounces of silver produced at San Dimas and 50 per cent of any excess at $4.12 per ounce (increasing by 1 per cent per year). Thereafter Primero will deliver to Silver Wheaton a per-annum amount equal to the first six million ounces of silver produced at San Dimas and 50 per cent of any excess at $4.20 per ounce (increasing by 1 per cent per year). The company will receive silver spot prices only after the annual threshold amount has been delivered.
(3) Black Fox was subject to a gold purchase agreement which continues and was assumed by the company upon its acquisition of the mine. According to the gold purchase agreement, Sandstorm is entitled to 8 per cent of production at the Black Fox mine and 6.3 per cent at the Pike River property.
SAN DIMAS OPERATING RESULTS
Three months ended
March 31, Dec. 31, Sept. 30, June 30, March 31,
2016 2015 2015 2015 2015
Tonnes of ore mined 151,193 228,539 232,014 263,868 263,747
Tonnes of ore milled 149,182 250,796 228,392 256,235 257,670
Tonnes of ore milled per
day 1,639 2,726 2,483 2,816 2,863
Average mill head grade
(grams/tonne)
Gold 4.13 5.23 4.75 4.60 5.01
Silver 198 300 272 275 250
Average gold recovery rate
Gold 99% 98% 96% 96% 96%
Silver 97% 96% 95% 95% 93%
Produced
Gold-equivalent (ounces) 22,901 50,370 49,566 44,128 46,569
Gold (ounces) 19,578 41,371 33,623 36,500 39,861
Silver (million ounces) 0.92 2.32 1.90 2.15 1.93
Sold
Gold-equivalent (ounces) 29,140 48,466 53,475 38,747 45,256
Gold (ounces) 24,300 40,320 34,471 34,273 38,642
Silver at fixed price
(million ounces) 1.35 2.10 2.01 1.26 1.90
Silver at spot (million
ounces) - - 0.85 - -
Average realized price (per
ounce)
Gold $1,178 $1,092 $1,115 $1,187 $1,207
Silver(1) $4.24 $4.24 $7.42 $4.20 $4.20
Total cash costs (per gold
ounce)
Gold-equivalent basis $998 $535 $507 $608 $582
Byproduct basis $968 $414 $219 $487 $479
All-in sustaining costs
(per ounce)(2) $1,362 $753 $454 $822 $659
Revenue ($000) $34,333 $52,960 $59,660 $45,979 $54,640
Earnings (loss) from mine
operations ($000) ($6,390) $11,408 $18,179 $9,515 $14,615
(1) Average realized silver prices reflect the impact of the silver purchase
agreement with Silver Wheaton Caymans (see other liquidity considerations in
the company's first quarter 2016 MD&A).
(2) For the purposes of calculating all-in sustaining costs at individual
mine sites, the company does not include corporate general and
administrative expenses.
BLACK FOX OPERATING RESULTS
Three months ended
March 31, Dec. 31, Sept. 30, June 30, March 31,
2016 2015 2015 2015 2015
Open-pit mining
Tonnes of ore mined - - 201,484 372,319 275,865
Strip ratio - - 4.40 4.02 5.87
Average gold grade
(grams/tonne) - - 2.01 2.02 1.99
Underground mining
Tonnes of ore mined 38,501 57,041 36,005 36,265 11,525
Average gold grade
(grams/tonne) 4.99 5.80 3.99 4.00 4.84
Tonnes increase (decrease)
in stockpile (185,952) (172,188) 3,979 186,409 96,471
Tonnes processed
Tonnes of ore milled 224,453 229,229 233,510 222,175 190,919
Tonnes of ore milled per
day 2,467 2,492 2,538 2,441 2,121
Average mill head grade
(grams/tonne) 1.94 2.51 2.66 2.65 2.49
Average gold recovery
rate 95% 96% 96% 97% 95%
Produced
Gold (ounces) 13,257 17,785 19,054 18,362 14,504
Sold
Gold at spot price
(ounces) 13,146 16,434 16,302 17,324 14,537
Gold at fixed price
(ounces) 1,336 1,015 1,640 1,378 1,858
Average realized gold price
(per ounce)(1) $1,118 $1,059 $1,089 $1,143 $1,137
Total cash costs (per gold
ounce) $851 $834 $780 $762 $1,077
All-in sustaining costs
(per ounce)(2) $1,404 $1,104 $1,000 $1,071 $1,552
Revenue ($000) $16,211 $18,444 $19,559 $21,392 $18,670
Earnings (loss) from mine
operations (000) $658 ($1,075) ($354) $1,563 ($3,145)
(1) Average realized gold prices reflect the impact of the gold purchase
agreement with Sandstorm (see other liquidity considerations in the company's
first quarter 2016 MD&A).
(2) For the purposes of calculating all-in sustaining costs at individual
mine sites, the company does not include corporate general and administrative
expenses.
CONDENSED CONSOLIDATED INTERIM STATEMENTS OF OPERATIONS
(In thousands of U.S. dollars, except per share)
Three months ended March 31,
2016 2015
Revenue $50,544 $73,310
------- -------
Operating expenses (40,282) (42,767)
Depreciation and depletion (16,057) (19,073)
------- -------
Total cost of sales (56,339) (61,840)
------- -------
Earnings (loss) from mine operations (5,795) 11,470
Exploration expenses (334) (121)
General and administrative expenses (5,532) (8,013)
------- -------
Earnings (loss) from operations (11,661) 3,336
Transaction costs and other expenses (386) (3,906)
Finance expense (3,259) (2,870)
Mark-to-market gain (loss) on convertible
debentures (375) 8,205
Other income (expense) (650) 3,301
------- -------
Earnings (loss) before income taxes (16,331) 8,066
Income tax (expense) recovery 3,159 (4,482)
------- -------
Net income (loss) for the year (13,172) 3,584
======= =======
Other comprehensive income (loss), net of tax
Items that may be subsequently reclassified to
profit or (loss)
Exchange differences on translation of foreign
operations, net of tax of nil - (514)
Unrealized gain on investment in Fortune Bay,
net of tax of nil 85 -
Reclassification of unrealized (loss) on
investment in Fortune Bay to impairment, net
of tax of nil - 456
------- -------
Total comprehensive net income (loss) for the
year (13,087) 3,526
======= =======
Basic net income (loss) per share (0.08) 0.02
Diluted net income (loss) per share (0.08) 0.02
We seek Safe Harbor.
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