Alamos Gold Inc

TSX:AGI

Earnings Call Transcript 2019-Q2

[Operator]

Good morning. I would now like to turn the meeting over to Mr. Jamie Porter, Chief Financial Officer. Please go ahead, sir.

[James R. Porter, Chief Financial Officer]

Thank you, operator, and thanks, everyone, for attending Alamos' Second Quarter 2019 Conference Call. In addition to myself, we have on the line John McCluskey, President and CEO; and Peter MacPhail, Vice President, Chief Operating Officer. I would like to remind everyone that our presentation will be followed by a Q&A session.On this call, we will be making forward-looking statements. Please refer to the disclaimer on forward-looking statements in our news release and MD&A as well as the risk factors set out in our annual information form. All forward-looking statements on this call are qualified by these cautionary statements. There can be no assurance that our forward-looking statements, even though considered reasonable by management based on information on hand, will prove to be accurate. Future results and events could differ materially.Technical information in this presentation has been reviewed and approved by Chris Bostwick, our Vice President of Technical Services and a qualified person. Also, please bear in mind that all the dollar amounts mentioned in the conference call today are in United States dollars unless otherwise noted. Now I'll turn it over to John, who will provide you with an overview.

[John A. McCluskey, President, CEO & Director]

Thank you, Jamie. Our second quarter results were solid, both operationally and financially. We produced just over 125,000 ounces of gold at costs that were down significantly from 2018. Our operations performed well led by Island Gold, which set another quarterly record for production. This contributed to a strong consolidated financial performance with record operating cash flow of $72 million. Consolidated total cash costs of $699 per ounce were below the low end of guidance, down 16% from the second quarter of 2018. All-in sustaining costs of $926 per ounce were also down 7% from a year ago. With a solid first half of the year, we will remain well positioned to achieve our full year production and cost guidance. We have several internal growth initiatives underway, which will be drivers for further improvement for our financial performance. We're now less than a year away from starting to reap the benefits in the form of strong free cash flow growth. The lower mine expansion at Young-Davidson is progressing well as was seen on multiple analysts and investor tours in June. The tie-in of the upper and lower mines remains on track for completion in the first half of 2020. In Island Gold, we're already seeing the benefit of the Phase 1 expansions with record production and free cash flow through the first half of the year. We received Phase 2 expansion permit in May ahead of schedule, and ongoing exploration results continue to impress, particularly in the untested area between the main and eastern extensions. We've put 5 holes in this area to date, and it's had high-grade mineralization, including 103 grams per tonne over 4 meters. This ongoing exploration success supports a growing orebody which is being incorporated to a Phase 3 expansion study of the operation.In Mexico, construction of the high-grade, high-return Cerro Pelon project is on track. We expect to start stocking ore later this year with additional production in early 2020. In Turkey, construction activities continue to ramp up with the major [ efforts ] underway. We expect Kirazli to take our consolidated production of about 600,000 ounces per year in 2021, which further -- will further reduce our costs. I'll now turn the call over to our CFO, Jamie Porter, to review our financial performance. Jamie?

[James R. Porter, Chief Financial Officer]

Thank you, John. As John mentioned, we had a very strong second quarter from a financial perspective. Highlights include record operating cash flow of $72 million and the lowest total cash costs we've reported in years at $699 per ounce. Revenues for the second quarter were $168 million from the sale of 128,500 ounces at an average realized price of $1,309 per ounce. Gold sales were approximately 3,000 ounces higher than production in the quarter as we call it out from the sale of ounces produced in the first quarter. Second quarter total cash costs of $699 were well below the midpoint of our guidance range of $730 per ounce. All-in sustaining costs of $926 were within our guidance range of $920 to $960 per ounce. Lower costs reflected a greater contribution of low-cost production from Island Gold and lower-than-budgeted costs at Mulatos. In the first half of 2019, higher costs at Young-Davidson more than offset by lower costs at Island Gold and Mulatos. We expect this to normalize throughout the remainder of the year and for all operations to be within their guidance range. Overall, we remain well positioned to meet our full year cost guidance. Operating cash flow before changes in the noncash working capital was a record $70 million or $0.18 per share. This was driven primarily by lower costs and corresponding higher margins. Our reported net earnings of $24 million or $0.06 per share included unrealized foreign exchange gains of $7 million, partially offset by other losses totaling $1 million. Excluding these items, our adjusted net earnings were $18 million or $0.05 per share.Capital spending totaled $71 million in the second quarter, including $20 million of sustaining capital, $47 million of growth capital and $4 million of capitalized exploration. Capitalized -- capital spending is expected to increase in the second half of 2019 primarily driven by higher spending in Island Gold and Kirazli with the ramp-up of construction. Our full year capital guidance remains unchanged between $290 million and $315 million for the year. We repurchased and canceled another 200,000 shares under our share buyback program in the quarter, bringing the number of shares repurchased in the first half of this year to 2.7 million at an average price of USD 4.17 per share for a total cost of $11 million. We purchased these shares at very attractive levels with the current share price approximately 50% higher. We will continue to be opportunistic with the buyback, balancing it with capital spending on our growth projects. We ended the quarter with no debt and approximately $200 million in cash and equity securities. We remain well positioned to fund our internal growth initiatives over the next year before transitioning to a period of strong free cash flow growth starting in the second half of 2020. I'd now like to turn the call over to our Chief Operating Officer, Peter MacPhail, to provide an overview of operations.

[Peter K. MacPhail, Chief Operating Officer]

Thank you, Jamie. Each of our mines performed well in the second quarter and each remains on track to meet annual guidance. Young-Davidson produced 45,000 ounces of gold with underground mining rates increasing to 6,700 tonnes per day. Grades mined and milled were somewhat below our annual guidance due to [ self-sequencing ]. And we're expecting this to -- expecting those grades to increase in the second half of the year. Total cash costs of $828 per ounce and mine site all-in sustaining costs of $1,084 per ounce were higher than the annual guidance due to lower grades mined and higher maintenance costs. Both are expected to decrease in the second half of the year to be consistent with guidance. The lower mine expansion is on track to be completed in the first half of 2020. As previously guided, this will require approximately 3 months of downtime in the Northgate shaft to tie in the upper and lower mines, during which time, ore from the upper mine will be trucked to surface processing at a reduced rate. Once completed, we expect mining rates to ramp up to above 7,500 tonnes per day in the second half of 2020 and towards 8,000 tonnes per day in 2021. Island Gold had another quarterly record with production of 39,500 ounces, a 48% increase compared to the second quarter of 2018. Yield performance was driven by higher mine grades of 14.5 grams per tonne and mill throughput of 1,130 tonnes per day [ posed by my ] annual guidance. We're continuing with a large exploration program and incorporating the ongoing success into a Phase 3 expansion study.Total cash costs of $473 per ounce were consistent with guidance and down 19% from a year ago, reflecting higher mine grades. Mine site all-in sustaining costs of $631 per ounce were lower than the annual guidance, reflecting lower sustaining capital spending in the first half of the year. Expect to catch up in the second half, bringing mine site all-in sustaining costs in line with guidance for the full year. Mulatos had another solid quarter, producing 36,300 ounces, a total cash cost of $725 per ounce, and mine site all-in sustaining cost of $815 per ounce. Production was consistent with annual guidance, while costs were well below plan, reflecting higher-grade stacked and the recovery of an additional 2,000 ounces concentrate in the mill, which carried minimal costs. Total cash costs of mine site all-in sustaining costs are expected to return to guidance levels for the remainder of the year.Mining activities at La Yaqui Phase 1 are expected to wind down in the third quarter, including a relatively short but highly profitable mine life. As it winds down, we'll begin stacking ore from Cerro Pelon, another high-grade and highly profitable project. We also completed permitting of La Yaqui Grande, having received approval for environmental impact assessment and change of land use permits over the past few months. The focus at La Yaqui Grande is to complete detailed engineering in support of project design and economics. We continue to evaluate value engineering initiatives and ongoing exploration results under Lynn Lake project. Our understanding of the project has greatly improved over the past 18 months. We're seeing opportunities for higher returns, need more time to properly evaluate the various production scenarios and incorporate ongoing exploration results with additional drilling planned in the second half of the year. Once complete, this will be incorporated into an updated feasibility study. At Kirazli, the construction activities are ramping up with various contractors having mobilized the site. The workforce continues to grow with over 200 people on site. Earthworks are underway and construction of the water reservoir and power line are expected to be completed by the fourth quarter. We expect Kirazli to bring consolidated production to over 600,000 ounces per year in 2021 while significantly growing our cost profile. With that, I'll turn the call back to John.

[John A. McCluskey, President, CEO & Director]

Thank you, Peter. That concludes the formal portion of our presentation. We now turn the call over to the operator to open the session for questions and answers.

[Operator]

[Operator Instructions] We have a question from Cosmos Chiu from CIBC.

[Cosmos Chiu]

Congrats on a very good Q2. Maybe first off, on Island Gold here. As you mentioned, the grade was good in Q2 and actually better than what you have budgeted. Could you maybe talk a bit more about that? Was that based on any kind of positive grade reconciliation? Ultimately, I'm just trying to figure out the sustainability of that higher grade for the rest of 2019?

[Peter K. MacPhail, Chief Operating Officer]

Yes, thanks Cosmos. We don't provide kind of quarter-by-quarter guidance. So we do see some variability in the grade quarter-by-quarter. It did actually outperform a bit during the quarter. We're kind of in that high-grade -- well, the entire mine is a high-grade mine at 10.5 grams, but we expect for the year to be in line with the guidance. I mean we're expecting it to be kind of in the 10-, 11-gram range for the remainder of the year.

[Cosmos Chiu]

Okay. So we're just getting into the higher-grade pockets in Q2. It wasn't any kind of positive grade reconciliation that you can recognize.

[Peter K. MacPhail, Chief Operating Officer]

In Q2, we did actually -- we were actually positive a bit on grade, maybe in the kind of range of -- in the 5% to 10% range, which is always good.

[Cosmos Chiu]

Yes, it's not -- that's good. Your mining rate in Q2 was a bit lower, 991 tonne per day. Peter, maybe, could you maybe talk a bit about that? And what do you need to do to get up to 1,100 tonnes per day, which is your guidance?

[Peter K. MacPhail, Chief Operating Officer]

Yes, thanks. Yes, we were a bit lighter in the quarter at just by 1,000 tonnes per day. But it is related to grade as well. So we mined 14.5 gram per tonne at a 1,000 tonnes per day. And when we're in those -- that means that in those higher grade stopes, we were mining 20 grams per day -- 20 grams per tonne. So in those high-grade stopes, which are the transverse stopes, we -- it was really the first time that we were mining that method. So a, there's a cemented rockfill that we need to place for the first time. We're mining transverse stopes for the first time. I -- did a pretty good job. We -- at 20 grams per tonne in those stopes, if you recall, when we were there earlier, and you were looking at the grades in those stopes, you want to make sure you get it all. So on balance, we took it a little bit easier to make sure we got it all. And I think it was the right decision. We really have no challenges on getting it to that 1,100 tonne per day rate.

[Cosmos Chiu]

For sure. And then looking ahead, you talk about the Phase 2 expansion. You talk about also Phase 3 expansion here, Island Gold. You talk about potentially over 1,200 tonne per day. I'm just trying to kind of merge it together in terms of -- you're doing a lot of drilling right now on Island Gold. You're expanding the resource. But based on the size of your current resource, what kind of throughput can you -- is it big enough right now to be -- for you to look at significantly over 1,200 tonnes per day? Or do we need to see more ounces coming out for what you're doing on the exploration front before we can start looking at a much bigger throughput here? How should we look at it?

[Peter K. MacPhail, Chief Operating Officer]

At 1,100 going to 1,200 tonnes a day with that expansion, I think, that's just -- we are now permitted at that 1,200 tonnes per day. So that will just be a natural evolution over the next -- into early next year, we should be there. Anything beyond that really is subject to studies that we're -- scoping studies that we're doing now, and it would require additional capital. So any increase in throughput that we get would need to be economically justified to spend that additional capital. We also need to permit that -- another permitting exercise to get to whatever that might be. We do see ongoing exploration success. It continues to evolve. And I think we'll just take our time and make sure we do this right.

[Cosmos Chiu]

Yes, of course. Maybe switching gears a little bit now you're going to Turkey. Congrats again for getting all the permits earlier on this year. It sounds like things are getting rolling in terms of construction. But could you remind us in terms of some of the key deliverables here that's coming up? I guess you mentioned earthworks and water, reservoir and whatnot. But what are some of the key sort of items that you need? Can you remind us, is there any kind of rainy season in Turkey where you are? And do we need to, say, build a water reservoir before the rain comes?

[Peter K. MacPhail, Chief Operating Officer]

Yes. We're in construction on the water reservoir. We're in construction on power lines. Those should be completed by the end of the year. There's no real season that would -- well, yes, there is a rainy season that comes in the winter like the kind of January/February period. It's not so much [ rain ]. It's snow, rain, muddy. We're in construction on the site and on the -- getting down to bedrock in the area of the leach pad. So all of that becomes easier or is easier in this time of year when you're not in the wet season, and there's some work that we need to kind of get done to make sure that we smoothly transition into the muddier season. But it's all going fine.

[Cosmos Chiu]

Maybe a quick question here for Jamie. I was reading in the MD&A that you're applying for the strategic investment incentive certificate so that you can further reduce your taxes. How much lower can you go in terms of your taxes in Turkey?

[James R. Porter, Chief Financial Officer]

So that's the additional incentive. So as we noted in the MD&A, we were successful in obtaining what's called the regional tax incentive, which gets our effective income tax rate down to 4.4%. We'll be able to reduce that down to 2.2% if we are deemed eligible for the strategic incentive.

[Cosmos Chiu]

Okay. And when will you find out, Jamie?

[James R. Porter, Chief Financial Officer]

Probably within the next couple months.

[Operator]

[Operator Instructions] We have a comment from Kerry Smith from Haywood Securities.

[Kerry Smith, VP & Senior Mining Analyst]

Maybe Jamie can answer this or Peter, the $75 million that you plan to spend at Kirazli this year, is that going to be sort of evenly spread over the year? And will it be possible to actually spend all that capital?

[James R. Porter, Chief Financial Officer]

Kerry, it's Jamie here. Yes. So I mean, the $75 million was the target that we put out at the start of the year, assuming we were full steam ahead effectively in January. We have experienced some delays. So I would suggest that -- a conservative -- depending on how you look at it, maybe an aggressive target for the rest of this year. There's a good chance that we'll come in between $50 million and $60 million for the year, and that would be equally spread between Q3 and Q4. So probably $20 million in Q3, maybe $30 million in Q4.

[Kerry Smith, VP & Senior Mining Analyst]

Okay. And then that would leave, I guess, $80 million to spend next year and -- or maybe a bit more than $80 million, I guess, eh?

[James R. Porter, Chief Financial Officer]

Yes, there's a residual. I mean we've spent about $20 million already. So $20 million plus another $50 million, $60 million gets you to $80 million. You're looking at $70 million to $80 million in 2020.

[Kerry Smith, VP & Senior Mining Analyst]

Yes. So that $20 million you spent is to the end of Q2. Is that correct?

[James R. Porter, Chief Financial Officer]

Correct.

[Kerry Smith, VP & Senior Mining Analyst]

Okay. Okay.

[James R. Porter, Chief Financial Officer]

And that's $10 million that was spent this year and $10 million that was spent in the latter half of last year.

[Kerry Smith, VP & Senior Mining Analyst]

Okay. Okay. Okay, great. And for La Yaqui Grande, what is the timing on the completion of the engineering studies or some sort of engineering document that we would be able to take a look at?

[James R. Porter, Chief Financial Officer]

So we're working through that now, Kerry. The plan would be to have -- [ kind of go through ] that internal review by the end of this year. We put out our guidance for 2020 in January of next year. We'll look to update the market with respect to our plans on La Yaqui Grande.

[Kerry Smith, VP & Senior Mining Analyst]

Okay. Okay, great. And then maybe John can answer this question. In your opening remarks, John, you had mentioned a comment about the internal growth initiatives that were underway to improve your financial performance. Are those the projects that we're aware of? Or there are other things that you're looking at internally?

[John A. McCluskey, President, CEO & Director]

So those are the projects that we're speaking about throughout the call. The plan of the lower mine at Young-Davidson, bringing on lower-cost production from Cerro Pelon, lower-cost production at Kirazli in Turkey, those are essentially the initiatives. We've got [ site ] projects bringing great power in, in Mexico, which is going to further reduce costs. There's a variety of things like that. But whole focus on what we're doing is to bring onboard lower-cost production, be more efficient at mining, be aware of where we're already mining it and essentially capitalize on this whole approach we're taking to expand our margins, increase production, lower costs, expand margins.

[Kerry Smith, VP & Senior Mining Analyst]

Okay. And John, perhaps you can make just a comment generally on Esperanza. I know this new governor -- and I think you've had some discussions or you're going to have some discussions. Just wondering how you see that process going?

[John A. McCluskey, President, CEO & Director]

So we met with the governor's office when -- about 1.5 months ago, and we had a very productive meeting there between the federal government who sent representatives along with us to attend that meeting with the governor's team. They're quite supportive of the initiatives that we're taking, and we'd like to see -- I would say we were very encouraged by the feedback that we received and certainly like to see more economic development in the area. And it's just a question of them getting more familiar with what exactly the project entails.

[Kerry Smith, VP & Senior Mining Analyst]

Okay. Okay. So is the process now that you need to provide them with some updated engineering study? Or what ...

[John A. McCluskey, President, CEO & Director]

I think the -- it's a pretty new government, and they're sort of fighting fires on a variety of fronts in that state right now. And I would say that the team that's focused on a project like this is fairly busy right now and not that familiar with mining industry. Mining isn't something that's done in Morelos state. It's a fairly small component of what goes on. It's mostly quarries and that kind of thing, sand and gravel and that kind of thing. So we've got some work to do in terms of just bringing that particular part of their team up to speed with the project. And they're -- like most people, they're being unfamiliar with mining, with open-pit heap leaching. They're certainly concerned about environmental risks on the one hand, but they're also very concerned about the high unemployment in that state right now, and they want to see what kind of benefit that we can bring through our investment and job creation. So it's an attractive enough opportunity that they realize where the upside is quite readily. But they, on the other hand, want to assess what the risks are, and on balance, we're quite confident that they're going to come around to a very supportive point of view when it comes to developing the project. There's another wrinkle to it. There's a few kilometers away, about 6 kilometers away, there's a fairly interesting archaeological site, which I visited while I was down there 6 weeks ago, and it sustained some fairly significant damage from an earthquake a couple years ago. And they're looking for some -- in terms of helping to rehabilitate and preserve that archeological site. And that's something that I would say gives us an interesting opportunity in order to sort of work on that social life side of things. It's often -- what we do is to try to find something where we get involved and be very, very helpful, where otherwise, the government might be short of funds that are lacking in the financial wherewithal for the time being anyway, to get behind something like that. So we're looking into that. We've got some young archeologists that we actually employ. And they're working on site and taking a good measure of what might be involved, and that's just another thing that we're working on that I think will help bring in sort of a broader base of support within the state to support the development of the project.

[Operator]

There are no further questions at this time. This concludes this morning's call. If you have any further questions that have not been answered, please feel free to contact Mr. Scott Parsons at [phone], extension 5439. Thank you.