Alamos Gold Inc

TSX:AGI

Earnings Call Transcript 2022-Q2

[Operator]

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

[James Porter, Chief Financial Officer]

Thank you, operator, and thanks, everyone, for attending Alamos' Second Quarter 2022 Conference Call. In addition to myself, we have on the line today both John McCluskey, President and CEO; and Peter MacPhail, Chief Operating Officer.

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 Q&A 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 Senior 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.

Now I'll turn it over to John to provide an overview of the quarter.

[John McCluskey, President, Chief Executive Officer and Director]

Thank you, Jamie, and welcome, everyone, to the call.

Starting with Slide 3. We had a good second quarter on multiple fronts, meeting our short-term operational targets while also delivering on 2 key growth initiatives, including achieving first production at La Yaqui Grande and announcing a larger and more profitable Phase III expansion of Island Gold. Both have solidified our strong outlook supporting growing production and declining costs. At the same time, as we are growing our production, we also expect to reduce our total greenhouse gas emissions as we detailed in June with a 30% reduction targeted by 2030.

Our second quarter production of 104,000 ounces of gold was in line with guidance, while total cash costs of $895 per ounce and all-in sustaining costs of $1,170 per ounce were well below quarterly guidance and substantially an improvement over the first quarter. This reflected solid performances from our Canadian operations, including a significant increase in production and decreasing costs at Island Gold as well as a strong start from La Yaqui Grande.

With production from La Yaqui Grande continuing to ramp up, we expect our consolidated production to increase between 115,000 and 125,000 ounces of gold in the third quarter. We expect a further increase in the fourth quarter and decrease in total cash costs, given La Yaqui Grande’s substantially lower cost profile. We remain well positioned to achieve our full year guidance and production guidance and cost guidance.

Now looking at Slide 4. La Yaqui Grande will be a key driver of higher production and lower costs over the near term. Island Gold is going to continue that trend over the long term. At the end of June, we announced the Phase III-plus expansion of Island Gold to 24,000 tonnes per day, creating a larger, longer life and even more profitable and valuable operation.

Following the completion of the shaft in 2026, production is expected to more than double from current levels to average 287,000 ounces of gold per year with all-in sustaining costs through the larger expansion -- 43% larger mineable resource and lower capital per ounce costs, all contributing to a significantly more valuable operation with a $1.8 billion valuation at current gold prices.

Island Gold would not only be a much larger and productive operation, but will also become a greener mine with the expansion expected to reduce our life-of-mine carbon emissions by 35% compared to the existing smaller operation.

Moving to Slide 5. This is going to transform Island Gold into one of Canada's largest and most profitable gold mines. Following the completion of the expansion, Island Gold will be the seventh largest gold producer in Canada, the lowest cost and the fifth most profitable. This is truly a unique asset and like Young-Davidson among the most valuable operations in Canada.

Turning to Slide 6. La Yaqui Grande and Island Gold are key contributors to our strong outlook with growing production and declining costs. We expect to be producing closer to 500,000 ounces of gold per year by next year and at progressively lower costs with all-in sustaining costs expected to decrease 18% to approximately $1,000 per ounce by 2024.

Following the completion of the Phase II expansion, we expect our annual production to increase above 600,000 ounces of gold per year with a further decrease in costs. Lynn Lake remains an important part of our longer-term growth strategy with the capacity to increase our production to approximately 800,000 ounces of gold per year.

In the near term, we are taking a more conservative and balanced approach to growth by deferring any significant capital on Lynn Lake until the Phase III expansion is well underway, such that we can fund this growth internally while generating solid free cash flow over the next several years.

I'll now turn the call over to our CFO, Jamie Porter, to review our financial performance.

[James Porter, Chief Financial Officer]

Thank you, John. Moving on to Slide 7. We sold [102,164] ounces of gold at a realized price of $1,871 per ounce for revenues of $191 million in the quarter. Total cash costs averaged $895 per ounce and all-in sustaining costs were $1,170 per ounce, a significant improvement from the first quarter, reflecting higher grades at Island Gold, the strong start at La Yaqui Grande and the weaker Canadian dollar. As previously guided, we expect our second half costs will be lower than the first half, with the ramp-up of low-cost production from La Yaqui Grande being the largest driver.

Operating cash flow before changes in noncash working capital was $85 million or $0.22 per share in the second quarter. Our reported net earnings were $6 million and included a noncash after-tax inventory adjustment of $15 million in Mulatos. Unrealized foreign exchange losses of $13 million recorded within deferred taxes and foreign exchange and other gains of $4 million.

Given the decline in the gold price during the quarter and higher costs at Mulatos, a review of the carrying value of its leach-pad inventory was undertaken, which resulted in a $15 million inventory adjustment, which is a noncash reduction. Excluding this and other noncash items, our adjusted net earnings were $29 million or $0.07 per share.

Capital spending totaled $69 million in the second quarter, including $20 million of sustaining capital, $43 million of growth capital and $6 million of capitalized exploration. With the ramp-up of construction on the Phase III-plus expansion at Island Gold, we expect capital spending to increase in the second half of the year.

We generated $7 million of free cash flow in the quarter, reflecting the strong performances at Young-Davidson and Island Gold. With the ramp-up of production from La Yaqui Grande, we expect stronger free cash flow in the second half of the year. We returned a record $18 million to shareholders during the quarter, consisting of our quarterly dividend of $10 million or $0.10 per share on an annualized basis and $8 million in share buybacks.

We continue to have a strong balance sheet with no debt, $122 million in cash, $23 million of equity securities and $500 million of undrawn credit capacity. We are well positioned to fund our internal growth projects while supporting ongoing returns to shareholders.

I'll now turn the call over to our COO, Peter MacPhail, to provide an overview of our operations.

[Peter MacPhail, Chief Operating Officer]

Thank you, Jamie. Moving to Slide 8. Young-Davidson had another strong quarter with mining rates averaging 8,160 tonnes per day, exceeding design rates of 8,000 tonnes per day for the fourth consecutive quarter. This drove production of 46,400 ounces and record mine-site free cash flow of $31 million.

Mill throughput averaged 7,750 tonnes per day, lower than tonnes mined due to planned liner change in the mill. This resulted in a stockpile being built up on surface, which will be processed in future quarters. Given the strong overall start to the year, costs in the quarter and through the first half of the year remain towards the lower end of annual guidance. Young-Davidson remains on track to meet its full year production and cost guidance.

Over to Slide 9. Island Gold produced 37,300 ounces of gold in the second quarter, a 52% increase from the first quarter. This reflected higher grades, which averaged 10 grams per tonne and higher processing rates of 1,260 tonnes per day. Costs were also down substantially from the first quarter and consistent with that annual guidance.

The higher production and lower costs contributed to mine-site free cash flow of $20 million in the quarter. With similar grades expected through the remainder of the year, remained on track to achieve our full-year guidance.

Over to Slide 10. Construction activities on the Phase III expansion will continue ramping up through the second half of this year. As we've seen in the photos, site clearing and preparation work is well underway and expected to be completed in the third quarter. The pre-sink is expected to begin in August and shaft thinking to start in 2023 with first production from the shaft in 2026.

We've made significant progress on the expansion to date with the bulk of the earthworks completed. The tailings facility already expanded and more than 30% of the project capital already committed. Combined with the fact that this is an operating mine, this is a lower risk expansion, which is going to create a bigger lower-cost operation that will be among the most profitable and valuable gold mines in Canada.

Moving to Slide 11. Production from the Mulatos District totaled 20,200 ounces in the second quarter at costs roughly in line with first half guidance. This included 15,200 ounces from Mulatos and 5,000 ounces from La Yaqui Grande. We expect substantially higher production from La Yaqui Grande in the second half of the year as stacking rates continue ramping up. Consistent with guidance, we expect approximately 65% of full year production from Mulatos District to come in the second half of the year at significantly lower costs.

Moving to Slide 12. Construction of La Yaqui Grande was completed in June, ahead of schedule. Total capital for the project is expected to come in at around $160 million, 13% higher than the initial 2020 estimate, primarily due to scope changes. This included the decision to build a new crusher instead of refurbishing the El Chanate crusher and the construction of a new camp to help mitigate the challenges with COVID-9.

With the early completion of construction and higher grade stack of 1.6 grams per tonne, production of 5,000 ounces and total cash costs of $450 per ounce exceeded expectations. Grade stack are expected to average closer to the reserve grade of 1.2 grams per tonne in the second half of the year. With stacking rates continued to ramp up to design rates of 10,000 tonnes per day, La Yaqui Grande is expected to drive significant production and free cash flow growth within the Mulatos District.

With that, I'll turn the call back to John.

[John McCluskey, President, Chief Executive Officer and Director]

Thank you, Peter. That concludes our formal presentation. I'll now turn the call back to the operator, who will open the lines for your questions. Operator?

[Operator]

Thank you. [Operator Instructions] And the first question is from Trevor Turnbull from Scotiabank.

[Trevor Turnbull, Scotiabank]

I just wanted to ask about the Lynn Lake feasibility study that you mentioned would come out after the EIS approval. And I just wondered if we should expect that the feasibility would be coming fairly quickly after that? Or if it might be delayed a bit, given that you also mentioned at the front that you don't really expect to commit a lot of significant capital to Lynn Lake until you're further along with Island Phase III. And I just wondered if you would perhaps hold off on the feasibility to keep it as contemporary as possible when you -- with when you do start spending.

[Peter MacPhail, Chief Operating Officer]

Hey, Trevor, it's Peter. We're working in parallel on the feasibility study update. Sometimes with permitting, you get some commitments that you have to build into it. So I could see it, thinking if its worked that in. But I would think we would look to come out with it in any case as soon as -- pretty soon after we get the permits in place.

[Operator]

The next question is from Fahad Tariq from Credit Suisse.

[Fahad Tariq, Credit Suisse]

One thing that I noticed wasn't in the presentation or the press release was talk about inflationary pressures, and that's positive. Can you talk a little bit about -- I understand there's some offsets with the higher production in the second half. Island Gold grades are doing better than expected. But maybe just talk a little bit about the underlying inflationary pressures if there are any that you're seeing?

[James Porter, Chief Financial Officer]

Yes, it's Jamie here. I think I mean, across the industry, we're seeing obviously higher diesel, higher cyanide, higher grinding media prices. I mean we've been able to manage the impact of inflation this year. We've certainly benefited from the weakness in the Canadian dollar. We've benefited from some of our diesel hedging that's in place has helped reduce our cost by about $20 an ounce. And we have long-term supply contracts in place.

So we are seeing inflationary pressures, but the factors that I mentioned, combined with the fact that we're bringing on low-cost production from La Yaqui Grande really helped offset that. So we've -- we're performing well from a cost perspective. We will see, I mean, you'd expect an inflation in the range of 5% to be impacting our cost for next year, but we'll look at what we can do, we set our annual budgets to mitigate that.

[Fahad Tariq, Credit Suisse]

Okay. And just a quick follow-up. One, like some of your peers are talking about labor inflation and labor tightness, particularly in Canada. Just curious if you're also noticing any specific pressures that are difficult to retaining employees, et cetera?

[James Porter, Chief Financial Officer]

We have not had any specific challenges at our operations. I think some of our peers have noted that with contractors that that's a challenge. And we are seeing that in terms of both contracted underground development and exploration drilling. But overall, it's not having a significant impact on our operations.

[Operator]

The next question is from Lawson Winder from Bank of America Securities.

[Lawson Winder, Bank of America Securities]

I have a couple, maybe a few questions. So first off, on La Yaqui Grande, congratulations on getting that started. But just how have you prepared LYG for the upcoming rainy season in Sonora?

[Peter MacPhail, Chief Operating Officer]

Yes. We're almost through it. I mean the rainy season kind of ends in late July, early August typically, and we've managed through it. I mean that – we’ve put ponds in place. You have -- with for running heap-leach operations, you have your preg pond, your barren pond and your event pond. The event pond is -- you've got a huge event pond there, just to be able to manage that. It will cover any sort of contingency that you could imagine with rain.

We also have a big -- you would have seen in the pictures, there's a large heap-leach area there with a lot of plastic down with no ore on it yet. So we've diverted any water that falls on that around the facility. So we're in good shape.

[Lawson Winder, Bank of America Securities]

And I mean, since you've now had an opportunity to observe how the leach pad performs with the rain, have you noticed any dilution or the need to use excess cyanide?

[John McCluskey, President, Chief Executive Officer and Director]

Well, we've been producing down there since 2005. It's not our first rainy season. And we learned how to manage pretty well that from time to time, you'll get a really unusual rainfall that will happen on one particular day, and that can have a very, very short-term effect on what we do. But other than that, I think we've got that rainy season issue well in hand.

[James Porter, Chief Financial Officer]

The other thing is that we're very -- we're early on in the heap-leach. There's not a lot of ore stacked on the pad yet, not a lot of water to deal with, not a lot of solutions to deal with. It's very -- it's just starting out. So you divert all that other water away from you.

[Lawson Winder, Bank of America Securities]

Okay. I wanted to ask about return on capital. So if I just kind of look at return on capital since 2019, it's been quite consistently around 9% of operating cash flow. And I just wanted to ask like, is that how you guys think about capital return as a percentage of operating cash flow?

[James Porter, Chief Financial Officer]

As a percentage of operating cash flow. I mean, we have targets and we're measured annually by our board with respect to our return on invested capital metrics. But I think we've been in a heavy investment phase, and we're starting to see the benefits of that. Young-Davidson now -- we've had 5 consecutive really strong quarters. We're spitting out annualized over $100 million a year. La Yaqui Grande has got a 60%-plus IRR. We're starting to see that -- those returns coming online now. So yes, I'd say we're targeting increases in our overall capital returns in the years ahead.

[Lawson Winder, Bank of America Securities]

But as a percentage of operating cash flow.

[John McCluskey, President, Chief Executive Officer and Director]

Well, we don't specifically pin it to that. But for example, we took advantage of very low share prices to get more active with the share buyback, and we've been opportunistic on that front. And so you might see some variability in shareholder return on that basis alone.

[James Porter, Chief Financial Officer]

Yes, when we look at our return on capital metrics, Lawson, we're looking at free cash flow, not just operating cash flow.

[Lawson Winder, Bank of America Securities]

Okay. Finally, I just wanted to also ask on Lynn Lake. So you've delayed Lynn Lake so as to push out the CapEx commitment so that it can be fully funded internally, which makes a lot of sense. So I just wanted to inquire about your slide that shows gold production growth, which has Lynn Lake -- it looks like full [indiscernible] in 2027, which would imply a start to spending in 2024.

But I mean as I understand 2024 is expected to include some heavy spending on the Island expansion. So am I thinking about that conceptually correct? I mean so might 2024 be a year where you have to draw out significantly on the balance sheet?

[James Porter, Chief Financial Officer]

Lawson, yes, I'll take that. No, not at all. I mean we're in great shape now. Now with La Yaqui Grande up and running, we should be cash flowing $100 million annually from Mexico. We're getting $100 million annually from YD. And at current gold prices, Island funds the majority of the Phase III plus expansion.

So we're free cash flow positive net of all the expansion spending over the next couple of years. We could easily start Lynn Lake in late 2024, early 2025 and finance that from existing operating cash flow. There wouldn't be a need for us to materially draw down our cash balance or access our credit facility.

[Lawson Winder, Bank of America Securities]

So I guess that as the question, I mean could you start even a little earlier? Like I mean could next year still be a reasonable time frame for spending on Lynn Lake?

[James Porter, Chief Financial Officer]

It could be. But as we've been saying for about 6 months now, our focus is on Phase III plus. That's the highest return development project we have in front of us. So we want to get going on that and move that forward before we start focusing on Lynn Lake as well.

[Operator]

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

[Kerry Smith, Haywood Securities]

Jamie, just on the reporting, you have split out La Yaqui Grande this quarter. Is that the plan on a go-forward basis to separate that from the main pit then in terms of the reporting?

[James Porter, Chief Financial Officer]

Yes, Kerry, we'll assess that going forward. We did decide to separate the physical, but I think some of the financial metrics are blended, but we do separately disclose our cost on La Yaqui Grande and Mulatos. I mean the reality is, going forward, La Yaqui Grande is going to be 80%, 85% of our production in Mulatos. So it may not make sense to have them separate, just given the Mulatos' production metrics will be somewhat immaterial. But we'll assess that going forward.

[Kerry Smith, Haywood Securities]

Okay. And you listed trucking some of ore over to the mill at YD from Island, can you just give me a rough idea as to what that cost in terms of grams that you -- that cost to truck it over there or cost per tonne or how are --

[James Porter, Chief Financial Officer]

Yes, Kerry I look at it as about a gram trucking cost, it's about $60 a ton of truck it over there. So you give up a gram on the head grade that you're tracking over there, you gain on -- you actually gain on operating -- on mill costs because it's a bigger mill, it's lower cost mills somewhat. And you -- but you move cash flow forward, and those are -- they're higher cost ounces, you're moving on cash flow forward because we have -- we've been carrying like kind of a 2-month stockpile at Island since we purchased the thing in 5 years ago. And the mine is performing well.

I don't see us in a situation where you're going to have to -- I don't see us in a situation, but we're going to wish we had that stockpile in front of that mill at Island. That mill at Island is limited from a permitting perspective to in around 1,200 tonnes a day a bit more, but it just makes sense to process stuff a bit earlier if we can. Otherwise, it's going to sit on the ground until we expand the mill in 2025.

[Kerry Smith, Haywood Securities]

Right. And you can benefit from a bigger stockpile at YD as well so that would obviously help.

[James Porter, Chief Financial Officer]

Yes.

[Kerry Smith, Haywood Securities]

Okay. And just last question, I'm not sure if [indiscernible] on but you talked about a bunch of drilling that was done on some of the peripheral targets around Mulatos, Carricito, [indiscernible], Halcon West. I think there was maybe Refugio even. Just wondering if in that -- those drill programs, if you've seen anything that is interesting or how the program is going?

[James Porter, Chief Financial Officer]

There's lots of really interesting stuff around the Mulatos District. It's a big land package that we have there and continues to surprise us. So all I'd say is maybe stay tuned, we'll put out results on when we have something to share.

[Peter MacPhail, Chief Operating Officer]

Yes. The only thing I'd add to that is we published that underground reserve at the start of the year, carried at 430,000 ounces at 4.5 grams. I think there's a potential for us to look to increase the size of that deposit. We're evaluating that in the second half of the year.

[Kerry Smith, Haywood Securities]

Okay. And that's pretty down year, right?

[Peter MacPhail, Chief Operating Officer]

Yes.

[Operator]

There are no further questions registered 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 416-368-9932 extension 5439.

Thank you for participating today. You may now disconnect your lines.