Alamos Gold Inc

TSX:AGI

Earnings Call Transcript 2021-Q2

[Operator]

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

[James R. Porter, Chief Financial Officer]

Thank you, operator, and thank you to everyone for attending Alamos' Second Quarter 2021 Conference Call. In addition to myself, we have on the line today John McCluskey, President and CEO; Peter MacPhail, Chief Operating Officer; and Scott R.G. Parsons, our Vice President of Exploration.We will be referring to a presentation during the conference call that is available through the webcast and on our website. I would also like to remind everyone that our presentation will be followed by a question-and-answer session. As we will be making forward-looking statements during the call, please refer to the cautionary notes included in the presentation, news release and MD&A as well as the risk factors set out in our annual information form. 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 this conference call are in U.S. dollars unless otherwise noted.With that, I'll turn it over to John to provide you with an overview.

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

Thank you, Jamie, and welcome, everyone.I'll begin with Slide 3. We've had a solid first half of 2021 highlighted by a strong operational performance at Young-Davidson and remain well-positioned to achieve our full year guidance. In the second quarter, we produced 114,200 ounces of gold at a total cash cost of $791 per ounce and all-in sustaining costs of $1,136 per ounce. As previously communicated, cost for above annual guidance in the quarter, reflecting a stronger Canadian dollar. It's been a year since we completed the lower mine expansion at Young-Davidson, and that infrastructure continues to perform well, meeting or exceeding targeted mining rates each quarter.Looking ahead, we expect Young-Davidson to ramp up to its design of mining greatly 8,000 tonnes per day in the third quarter, contributing to stronger company-wide production in the second half of 2021. We generated company-wide operating cash flow of $97 million in the second quarter, a 117% increase from a year ago with the prior year impacted by COVID-19 related downtime. Young-Davidson and Island Gold continued to generate solid ongoing free cash flow, which offset the increase in capital spending in the quarter, primarily in the La Yaqui Grande. We expect stronger company-wide free cash flow in the second half of the year, reflecting higher global production sales.Moving on to Slide 4. We're making good progress on our strong pipeline at North American projects. Construction is in full swing at La Yaqui Grande, and we're on track to achieve commercial production in the third quarter of 2022. At Lynn Lake, we continue demand per meeting and expect this to be completed by the middle of next year, which would enable us to make construction of the decision thereafter. Exploration activities in Lynn Lake also ramped up in the quarter, focusing on drilling and proximity to the known deposits as well as 2 regional targets.Development activities continue to ramp up on the Phase III expansion of Island gold, focusing on surface infrastructure, firming and detailed engineering. In February, we announced a 1 million ounce increase in high-grade reserves and resources. As of the end of 2020, all of which is upside to the Phase III expansion study published last year, we followed that up in June with another exploration update, which included the best cold drill to date, the downhole plunge from existing resources and proximity to our planned shaft. These results are ongoing and these results represent ongoing exploration success, and they clearly demonstrated this to follow or continue to grow, and highlight the significant upside potential that I think that the market is beginning to appreciate.These products underpin on a strong outlook with a 50% production growth potential to approximately 750,000 ounces per year by 2025, a significantly lower in sustaining costs of around $800 per ounce. This will support substantial free cash flow growth over the long term. We've had an ample capacity to fund this growth internally while continuing to generate solid free cash flow and return more capital to shareholders through our ongoing dividend, which we increased by nearly 70% over the past year.And with that, I will conclude my comments and turn the call over to CFO, Jamie Porter, who will give you a brief update on our financial performance for the quarter.

[James R. Porter, Chief Financial Officer]

Thank you, John. Moving on to Slide 5. We sold 107,600 ounces of gold at a realized price of $1,814 per ounce, for revenues of $195 million in the quarter. Gold sales were approximately 6,600 ounces less than gold produced due to the timing of shipments with those ounces sold in July to be realized as revenue in the third quarter.Total cash costs of $791 per ounce and all-in sustaining cost of $1,136 per ounce were higher than annual guidance, mainly reflecting the stronger the budgeted Canadian dollar. As we've previously noted, our 2021 guidance was based on a Canadian dollar foreign exchange rate of $0.75 compared to the actual rate of $0.81 in the second quarter. In the first half of 2021, the stronger Canadian dollar increased the total cash cost by approximately $30 per ounce. [Technical Difficulty]

[Operator]

Seems like Mr. Porter has disconnected from the call.

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

Should we wait for him to get back online or…

[Peter K. MacPhail, Chief Operating Officer]

Yes. We'll just give Jamie a moment to try and get back on the line.

[Scott Parsons, Vice President of Investor Relations]

Hey, seems as though Jamie is having trouble getting back on. So I will step into his portion of the call. So just to finish off his thought there, we expect a similar impact in the second half of this year. Should the Canadian dollar remain at $0.80. This is expected to keep cost at similar levels in the third quarter before declining in the fourth quarter. Operating cash flow before changes in noncash working capital increased to 117% year-over-year to $97 million or $0.25 per share in the second quarter. We reported a net loss of $173 million in the quarter, which included a noncash after-tax impairment charge of $214 million related to our Turkish projects, as a result of the previously announced decision to proceed with a bilateral investment treaty claim against the Republic of Turkey. The $214 million represented the full carrying value of our Turkish assets. Excluding the noncash impairment charge.

[James R. Porter, Chief Financial Officer]

If you can hear me. Sorry, my line just died, but I'm back now. So I'll keep going.

[Scott Parsons, Vice President of Investor Relations]

Yes. Please go ahead, Jamie.

[James R. Porter, Chief Financial Officer]

Thanks, Scott. Excluding that noncash impairment charge, foreign exchange gains and other losses, adjusted net earnings were $39 million or $0.10 per share in the quarter. Capital spending totaled $84 million in the second quarter, including $27 million of sustaining capital, $50 million of growth capital and $6 million of capitalized exploration. Additionally, we paid $3 million of capital advances for work and equipment largely related to La Yaqui Grande. Capital spending is expected to increase into the second half of the year, consistent with full year capital guidance of between 354 and $384 million. This reflects the ramp-up of development activities at La Yaqui Grande as well as with the Phase II expansion at Island Gold.We were free cash flow neutral in the second quarter, net of the increase in capital spending, the gold sales that we previously discussed that were deferred in the third quarter as well as a $6 million cash tax payment in Mexico, which we do not anticipate to continue in the second half of the year. We expect increased free cash flow in the second half of 2021, driven by higher production in gold sales. We paid our quarterly dividend of $10 million and so far, in 2021, we've returned more than $21 million to shareholders in the form of dividends and share buybacks. We are on track to return more than $40 million for the full year. We remain debt-free and ended the quarter with $234 million in cash, $22 million of equity securities and $500 million of undrawn credit capacity. We remain well-positioned to fund our internal growth projects while continuing to grow our cash position and returns to shareholders.I know, Peter was dropped off the call as well. So I'll see if, Peter, are you…

[Peter K. MacPhail, Chief Operating Officer]

Yes, I'm back on now, Jamie.

[James R. Porter, Chief Financial Officer]

Okay. I'll turn it over to our COO, Peter McPhail, to provide an overview of our operations for the quarter.

[Peter K. MacPhail, Chief Operating Officer]

Thank you, Jamie. Moving on to Slide 6. As John mentioned, we completed the lower mine expansion at Young-Davidson 1 year ago and since then, underground mining rates have consistently met or exceeded targeted rates. In the second quarter, mining rates averaged 7,500 tonnes per day right on target. And in the first half of the year, mining rates averaged 76 -- 50 tonnes per day exceeding target. Another mining horizon is currently being added and will enable underground mining rates to increase to the long-term rate of 8,000 tonnes per day starting in the second half of this year.In the second quarter, we produced 45,100 ounces of gold, generating $19 million of mine-site free cash flow. Total cash costs of $941 per ounce in mine-site all-in sustaining costs of $1,157 per ounce or above annual guidance in the second quarter due to the stronger Canadian dollar planned mining lower grades and lower mining rates in the first half of the year. Grades mined and underground mining rates are expected to increase over the remainder of the year, driving production higher and costs lower in the second half of 2021. With the $41 million of mine-site free cash flow-through the first half of the year and strong results expected in the second half. Young-Davidson remains on track to generate record mine-site free cash flow of more than $100 million in 2021.Over to Slide 7. Island Gold produced 33,200 ounces of gold in the quarter and generated $14 million of mine-site free cash flow. As previously guided, grades mined and process decreased from the first quarter. Grades are expected to remain at similar levels in the third quarter before increasing in the fourth quarter, average reserve grade of approximately 10 grams per ton for the full year. Total cash costs of $502 per ounce in mine-site all-in sustaining cost of $830 per ounce were both slightly higher than annual guidance, largely reflecting the stronger than budget Canadian dollar. Phase III expansion work continues to ramp up with the precinct of the shaft expected to begin mid next year. Current focus remains on permitting detailed engineering of the shaft, associated infrastructure and procurement of long lead items.Growth capital spending totaled $14 million in the second quarter and included completing expansion of the tailings facility. Capital spending is expected to increase in the second half of the year, consistent with annual growth capital guidance of $80 million to $85 million. We received our first batch of 2021 exploration results in June, and Island did not disappoint returning the best hole drilled to date. In a few moments, Scott Parsons, VP Exploration, will discuss these results in more detail as well as the encouraging early results we're seeing at Young-Davidson.Moving to Slide 8. Mulatos produced 35,900 ounces in the second quarter, and total cash costs and mine-site all-in sustaining costs of $893 and $1,144 per ounce, respectively. Cerro Pelon and existing surface stockpiles continue to supply most of the ore stocked in the quarter with mine activities in the main Mulatos pit focused on pre-stripping the El Salto to portion of the pit. Gold production is expected to increase in the second half of the year consistent with full year guidance. Mine-site free cash flow was negative $12 million in the quarter, reflecting the $6 million tax cash payments as well as growth capital and capital advances related to La Yaqui Grande for $25 million. Excluding La Yaqui Grande capital, Mulatos would have generated mine-site free cash flow of $12 million.Moving to Slide 6. Construction of La Yaqui Grande is progressing well with more than 1 million hours worked in the first half of 2021 with no lost time injuries. Pre-stripping activities continue to ramp up with over 5 million tonnes of waste mined during the quarter. Leach pad construction is now over 60% complete and concrete was port in the crusher area, where all major components of the crushing circuit are now on site. La Yaqui Grande remains on track to begin supplying low-cost production in the third quarter of 2022.I'll now turn the call over to Scott to provide an overview of exploration activities during the quarter.

[Scott Parsons, Vice President of Investor Relations]

We had a successful quarter from an exploration perspective, with excellent results for Young-Davidson & Island Gold, which I'll discuss briefly.Starting with Young-Davidson on Slide 10. Our focus over the last several years is in completing the lower mine expansion. With that complete and more cost-effective access to drill from underground now available, the $7 million is budgeted for exploration this year is the first significant exploration program at Young-Davidson since 2011.Over to Slide 11. The success we're having is on 2 fronts. Drilling has been successful in intersecting gold mineralization, down plunge from existing reserves and resources within the syenite that hosted Young-Davidson deposits. The drilling that began in 2020, extended mineralization, 220 meters below resources at that time and through the first half of 2021, drilling extended mineralization a further 150 meters below our 2020 drilling. We've also intersected other styles of gold mineralization outside of the syenite hosted in the high-grade structures within a hanging wall mafic, ultramafic, stratigraphy of the tisdale assemblage and also within structures developed in the footwall temiscaming sediments. This includes intersecting a high-grade structure, 200 meters south of the hanging wall contact of the syenite within the tisdale beyond the limits of any previous drilling. This Intercept returned 5.8 grams per tonne over 13.7 meters, which included 24 grams per tonne for 1.9 meters.Results to date highlight the significant geologic potential that exists in the property, not only to add reserves and resources within the syenite, with the deposit open at depth and a long strike to the west, but also at potentially higher grades associated with other styles and mineralization that are common across the Abitibi.Moving on to Slide 12. In addition to the good results we're seeing at Young-Davidson, we had an excellent start to the year on the exploration front Island Gold. In the second quarter, we drilled the best hole in the deposit to date. This is out of a total of over 7,000 drill holes and 1.3 million meters of drilling. Drill hole MH25-08 in resected 71 grams per tonne or 39 grams per tonne cut over 21 meters to with, down plunge from the large inferred resource block in the lower portion of Island East. This Intercept is significantly higher grade with 2 ways, approximately 4x greater than the average weight of the resource block and is within proximity to the planned shaft. Inferred resource block had already grown to include 1.3 million ounces grading 18 grams per tonne at the end of last year. These ongoing results demonstrate the potential for Island Gold deposits to continue to grow through exploration.Over to Slide 13. Island Gold's reserve and resource base has grown dramatically since we acquired it in 2017. By the time we completed the Phase III expansion study last year, reserves and resources have doubled to 3.7 million ounces. Since then, we added another 1 million ounces of high-grade reserves and resources, which is all upside to the already attractive economics outlined in the study. With the recent exploration results being among the best ever, and with the deposit open widely and down plunge, we expect further growth in Island Gold's reserve and resource base, highlighting the significant upside potential.And with that, I'll turn the call back over to John.

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

Thank you very much, Scott. That concludes the formal part of our presentation. I'll now ask the operator to open the line for your calls.

[Operator]

[Operator Instructions] And the first question is from Cosmos Chiu from CIBC.

[Cosmos Chiu]

I guess my first question is on the Canadian dollar here, 2 parts, #1, we all know that there's been a lot of strength in the Canadian dollar. As you mentioned, your guidance is based on an exchange rate of 0.75. So far, it's been closer to 0.8. Maybe a question for Jamie, when would you consider updating your guidance for the actual foreign exchange rate that's been realized so far?

[James R. Porter, Chief Financial Officer]

Yes. Thanks, Cosmos. Yes. I mean that has been, I mean, if you adjust for Canadian dollar strength, we're well within our guidance range. And if you look at it on a year-to-date basis, we're pretty close. I mean our operations have done a really good job keeping costs low despite the Canadian dollar strength and inflation in some areas. On a year-to-date basis, we're running at $773 million total cash cost relative to the top end of our guidance at $760 million. And on all-in sustaining costs, we're running at $10.79 million relative to the top end of our guidance of $10.75 million. So we're within $4 or within 1% on both cash costs and all-in sustaining costs. So we are expecting similar costs in the third quarter and much lower costs with higher grades at YD in Q4. So I think we'll reevaluate at the end of Q3. But we still got a chance to -- despite the impact of the Canadian dollar strength. I think we've still got a shot at being within the top end of our guidance range.

[Cosmos Chiu]

Of course. And then, Jamie, as a follow-up, and you and I have talked about this in the past. You have talked about potentially being opportunistic in terms of hedging your C dollar exposure. We've seen Canadian dollars sort of weaken a little bit, it strengthened again today, very volatile. How should we take a look in terms of your hedging program? Have you tried to be opportunistic in terms of adding to it?

[James R. Porter, Chief Financial Officer]

Yes, we absolutely have. I mean if you go back and look at the Canadian dollar up until recently, it's been pretty much a straight-line up since we put our budget together last September, October. So we have taken advantage of the recent weakness, the recent dip to increase our coverage perspective of our hedge program. I think going into the end of the second quarter, we only had 10% of our Canadian dollar exposure hedged. We're now up to 45% between both 77.5 and $0.81. So we are working to try to protect somewhere within that range for the second half of the year.

[Cosmos Chiu]

And then, Jamie, you mentioned the [ I-word ] inflation, and that appears to be a concern for a lot of investors for the mining space. Could you talk about -- are you seeing any kind of inflationary pressure, be it on labor or other input costs? And how should we look at it?

[Peter K. MacPhail, Chief Operating Officer]

Yes. I think Yaqui Grande, I'm not really concerned at all. We're on budget, on target halfway through, we're getting close to halfway through that project. We're mining at a rate of 55,000 to 60,000 tonnes a day pre-stripping at La Yaqui Grande, where we're right on budget. That's a contract mining rate. And we haven't seen cost pressures in Mexico yet, I suppose. But I mean, really not seeing anything, we're projecting right on schedule, right on budget there. The more longer-term ones, we're just getting going at Island. Our shaft sinking project is largely labor based. And labor rates haven't skyrocketed in Ontario. We're still, I think we had a 3% increase this year budgeted, and that's what we saw. I really don't see big changes.

[Cosmos Chiu]

And then one last question maybe for Peter as well. The grade in Q2 at Island Gold and Young-Davidson, both at the lower end of the full year sort of guidance. Could you comment, is it all due to mine sequencing? And how is it reconciled back to your block model here?

[Peter K. MacPhail, Chief Operating Officer]

Yes. Thanks for asking that question. Yes, it is sequencing slowly. We get really good reconciliation at both those operations within industry standard kind of 3% or so historically in the quarter. So it's some minor sequencing that put us at the low end of our guidance range for the quarter, it's just what you would expect to see running any mine. You get some fluctuations from quarter-to-quarter based on the still recipe that you happen to be mining.

[Operator]

And the next question is from Kerry Smith from Haywood Securities.

[Kerry Smith, VP, Director & Senior Mining Analyst]

Maybe Peter, just on the COVID situation in Mexico, has that had any real impact on the construction? I know you've got a lot of guys coming back and forth on the construction side? Has that been an issue for you there?

[Peter K. MacPhail, Chief Operating Officer]

The guys are managing it extremely well. We have a lot of people at site sometime. If you look at our entire population there of employees and contractors, now they're all there at the same time, but it approaches 2000, probably with well over 1,000 there at any given time. We instituted testing full PCR testing early on in this COVID pandemic at all 3 of our operations, and we continue it at all 3 of our operations. So we are able to screen these people that would be otherwise positive, which were able to screen them out prior to getting to site, and running longer rotations within that site. We've had a few along the way cases slip through, and then we keep them segregated and ship them back, and they're back once 2 weeks past the back again. So there have been a lot of cases in Mexico, and there have been a lot of cases within our workforce at Mexico, but we've managed to stream them out, and the guys are doing a great job shipping that over the camp.

[Kerry Smith, VP, Director & Senior Mining Analyst]

And then there was a comment in the MD&A about $45 a ton Canadian target at 8,000 tonnes a day for the mining costs at YD. Is that $45 number that you kind of expect to be at when you exit 2021 or would that be sort of a target once you get things stabilized maybe in the back end of 2022?

[Peter K. MacPhail, Chief Operating Officer]

Well, I guess we'll see, that is our targeted rate at 8,000 tonnes a day. So I think, we're there. We'll be at -- we should well average 8,000 tonnes a day for the rest of the year. And we'll see where the unit costs come in, but that is the target and yes.

[Operator]

[Operator Instructions] 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 for your patience, thank you for assisting on the call today, and have a great day.