Alamos Gold Inc

TSX:AGI

Earnings Call Transcript 2021-Q3

[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, everyone, for attending Alamos' Third Quarter 2021 Conference Call. In addition to myself, we have on the line today John McCluskey, President and CEO; and Peter MacPhail, Chief Operating Officer. We will be referring to a presentation during the conference call that's 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 Vice President of Technical Services and a qualified person. Also, please bear in mind that all of 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 you with an overview of the quarter.

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

Thank you, Jamie, and good morning, everyone. I'd like to start with Slide 3. Our third quarter was marked by strong ongoing performances at our Canadian operations, offset by short-term challenges at Mulatos as it enters a transitional period. Consolidated gold production of 104,700 ounces was lower than guided. While total cash costs and all-in sustaining costs were broadly in line with expectations, both were above our initial full year guidance and reflecting the impact of stronger than budgeted Canadian dollar. A key highlight in the quarter was Young-Davidson averaging record mining rates of 8,000 tonnes per day, producing 50,000 ounces of gold and generating $29 million in free cash flow. The mine is performing very well, and we expect it to be a strong free cash flow generator for a very long time. Mulatos had a challenging quarter with an above-average rainy season and slower-than-anticipated recoveries from stockpiled ore, affecting both production and costs. With Cerro Pelon winding down, stockpiles will make up a larger proportion of production from Mulatos until La Yaqui Grande start supplying low-cost production in the third quarter of 2022. Given the higher costs associated with processing the stockpiled ore, we expect costs to increase in the fourth quarter and through the first half of next year. Mulatos costs are expected to decrease in the second half of 2022 and will be significantly lower in 2023 as La Yaqui Grande ramps up. Looking to the fourth quarter, we expect production to increase at each of our operations, reflecting higher grades at Young-Davidson and operational improvements at Mulatos. Nevertheless, with the third quarter production shortfall at Mulatos, we are reducing our annual production guidance at the operations by 15,000 ounces or 3% on a consolidated basis to a range of 455,000 to 495,000 ounces. Production guidance for Young-Davidson and Island Gold remain unchanged with both operations continuing to perform well and on track to achieve full year guidance. Given the ongoing impact of the stronger Canadian dollar and higher-than-planned costs at Mulatos, we are also increasing our consolidated total cash cost guidance to a range of $790 to $810 per ounce and all-in sustaining costs to a range of $1,120 to $1,140 per ounce. Excluding the impact of the stronger Canadian dollar, costs through the first 3 quarters of this year are consistent with our initial guidance. Moving to Slide 4.While we encountered some challenges in the third quarter, our strong long-term outlook remains intact. At La Yaqui Grande, construction is advancing well and remains on budget and on schedule to achieve commercial production in the third quarter of 2022. At Island Gold, the Phase 3 expansion is progressing with a focus on permitting, detailed engineering and contract tendering. We also continue to have success growing the deposit and adding value through the drill bit with another exploration update planned in the fourth quarter. Finally, at Lynn Lake, we continue to advance permitting and expect this to be completed by the middle of next year, which would enable us to make a construction decision thereafter. Collectively, these high-return organic growth projects support our strong outlook with production potential of 750,000 ounces per year by 2025, a significantly lower all-in sustaining cost of around $800 per ounce. Given our solid balance sheet and ongoing cash flow generation, we can fund all this growth internally while supporting strong ongoing returns to shareholders through our dividend and share buybacks. 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. Moving on to Slide 5. We sold 110,500 ounces of gold at a realized price of $1,792 per ounce for revenues of $198 million in the quarter. Gold sales were approximately 5,800 ounces more than gold produced with some ounces produced in the second quarter being sold in the third quarter. Third quarter costs were broadly in line with guidance provided in the second quarter and higher than initial annual guidance. Total cash cost of $788 per ounce and all-in sustaining cost of $1,152 per ounce continued to be impacted by the stronger-than-budgeted Canadian dollar as well as higher-than-expected costs at Mulatos. Our previous 2021 guidance was based on a Canadian dollar foreign exchange rate of $0.75 compared to the actual rate of $0.79 in the third quarter and $0.80 year-to-date. This has increased total cash cost by $30 per ounce and all-in sustaining cost by $45 per ounce relative to our initial guidance. Reflecting the ongoing strength in the Canadian dollar and higher cost of Mulatos, we have increased our 2021 total cash cost and all-in sustaining cost guidance. This also reflects some of the inflationary pressures being felt across the sector and globally. We have managed these well through the first 3 quarters of the year but do expect more of an impact in the fourth quarter and into 2022. Operating cash flow before change in the noncash working capital decreased 21% year-over-year to $102 million or $0.26 per share in the third quarter, reflecting lower production and lower realized gold price. Net earnings were $25 million or $0.06 per share. Excluding the unrealized foreign exchange loss of $13 million, adjusted net earnings were $38 million or $0.10 per share. Capital spending totaled $89 million in the third quarter including $31 million of sustaining capital, $51 million of growth capital and $7 million of capitalized exploration. Capital spending is expected to increase in the fourth quarter, reflecting the ramp-up of capital spending on the Phase 3 expansion at Island Gold and at La Yaqui Grande. With significant capital expenditures scheduled for late in the year, we do see the potential for some fourth quarter capital to be deferred to early 2022. Free cash flow in the third quarter was negative $8 million, reflecting higher capital spending at La Yaqui Grande and Island Gold as well as lower-than-anticipated production. In addition to our quarterly dividend of $10 million, we also repurchased 600,000 shares at a cost of $4.5 million or $7.50 per share in the third quarter. Year-to-date, we have returned more than $35 million to shareholders in the form of dividends and share buybacks. We are on track to return more than $45 million for the full year. We remain debt-free and ended the quarter with $211 million in cash, $23 million of equity securities and $500 million of undrawn credit capacity. Combined with strong ongoing cash flow generation, we remain very well positioned to fund our growth projects internally. I'll now turn the call over to our Chief Operating Officer, Peter MacPhail, to provide an overview of operations for the quarter.

[Peter K. MacPhail, Chief Operating Officer]

Thank you, Jamie. Moving to Slide 6. Since the completion of the lower mine expansion at Young-Davidson mid-last year, underground mining rates have consistently met or exceeded the target rates. This trend continued in the third quarter with underground mining rates increasing to average a record 8,000 tonnes per day. This drove gold production higher to 50,000 ounces and costs lower, contributing to $29 million of mine site free cash flow in the quarter. Total cash cost of $810 per ounce to mine site all-in sustaining costs of $1,051 per ounce decreased 14% and 9%, respectively, from the second quarter, reflecting increased operating efficiencies. Young-Davidson is well positioned to meet its full year production guidance, with consistent mining rates of 8,000 tonnes per day and higher grades expected to drive another strong result in the fourth quarter. Given the impact of the stronger Canadian dollar, we have increased full year total cash cost guidance to approximately $850 per ounce and all-in sustaining costs to around $1,060 per ounce. Excluding this impact, costs were in line with initial guidance through the first 3 quarters of this year. With $70 million of mine site free cash flow year-to-date and higher production expected in the fourth quarter, Young-Davidson remains on track to generate mine site free cash flow of approximately $100 million in 2021. Over to Slide 7. Island Gold produced 28,000 ounces of gold in the quarter, 16% lower than the second quarter, reflecting lower tonnes processed. This was due to 8 days of downtime for unplanned maintenance in the mill early in the quarter. These onetime maintenance issues were resolved in July with the mill operating at full capacity in August and September. Additional maintenance protocol has been put in place along with an increase in spares -- critical spares to mitigate future unplanned downtime. As previously guided, grades mined and processed were similar to those in the second quarter. Grades are expected to increase slightly in the fourth quarter to average reserve grade of approximately 10 grams per tonne for the full year. Total cash costs and mine site all-in sustaining costs were both higher than initial guidance, reflecting the stronger Canadian dollar and unplanned mill downtime. Given the strong performance year-to-date, Island Gold remains on track to meet full year production guidance. As with Young-Davidson, we have increased full year total cash cost guidance to approximately $525 per ounce and mine site all-in sustaining costs to about $865 per ounce, reflecting the stronger Canadian dollar. Work continues to ramp up on the Phase 3 expansion with the pre-sink of the shaft expected to begin in mid-2022. The current focus remains on permitting, detailed engineering of the shaft and associated infrastructure as well as the paste plant. Contract tendering is ongoing with key contracts now in place for the shaft sinking headworks, shaft site, surface works. Growth capital spending totaled $14 million in the third quarter. While spending is expected to increase in the fourth quarter, some of the planned 2021 capital could be deferred into early 2022. Moving to Slide 8. Mulatos produced 26,700 ounces in the third quarter at total cash costs and mine site all-in sustaining costs $927 and $1,124 per ounce, respectively. The third quarter was impacted by the above-average rainy season and slower-than-anticipated recoveries from stockpiled ore stacked in the quarter. The heavier rainfall and wet ore limited stacking rates to about 1,700 tonnes per day, which is about 20% below our guidance. With Cerro Pelon winding down. We're also stocking a higher proportion of previously mined and stockpiled ore until La Yaqui Grande comes online in the second half of 2022. The leach cycle for their stockpiled ore has been longer than anticipated, and processing costs higher than expected given the additional reagents required. We are expecting higher production from Mulatos in the fourth quarter. However, given the weaker third quarter, we are reducing full year production guidance by 15,000 ounces. Given the higher processing costs associated with the stockpiled ore, we're expecting total cash costs and all-in sustaining costs to increase in the fourth quarter and have revised our 2021 guidance accordingly. We expect higher costs to persist through the first half of 2022 before decreasing in the second half of 2022 as La Yaqui Grande ramps up production. Mine site free cash flow was negative $20 million in the quarter, reflecting $23 million of growth capital and capital advances related to La Yaqui Grande. Moving to Slide 9. Construction of La Yaqui Grande remains on track as can be seen at the photos. The project is really coming along nicely. Pre-stripping of the open pit continues to ramp up with over 6 million tonnes of waste mined in the quarter. The haul roads are now completed, solution ponds are lined and the crushing circuit and ADR plant are advancing well. The project remains on schedule for commercial production in the third quarter of 2022 and on budget with $70 million of growth capital spend and $18 million advanced contractors towards the initial $137 million capital estimate. We expect cost to decrease at Mulatos in the second half of 2022 and more significantly into 2023 with La Yaqui Grande representing the majority of production from the Mulatos district. With that, I'll turn the call back to John.

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

Thank you, Peter. We'll now open the lines for Q&A session, and I'll turn the call to the operator to get that going. Thank you.

[Operator]

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

[Cosmos Chiu]

Maybe my first question is on Mulatos. If I look at your MD&A, I see that, as you mentioned, the MD&A recovery was 49% in Q3. Year-to-date, it was 55%, so it's come down. Last year, it was over 70%, I think, in part due to the stockpile ore. If I remember correctly, the stockpile ore if it is the stockpile material from day 1 since 2005. I seem to remember that the recovery of that material is lower. I guess my question is going around this is, ultimately -- I know the leach cycle is longer, but ultimately, what kind of recovery should we be expecting from this new mix that has more of the stockpile material on the leach pad these days?

[Peter K. MacPhail, Chief Operating Officer]

Yes. Cosmos, it's Peter. The recovery, if you look at just the ounces on versus off recovery in the quarter of 49%. So part of that is because of just the delay, really put 2 things there. The rainy season dilutes things on us. It was a particularly wet rainy season. And so those ounces are coming out in the fourth quarter and longer leach curve associated with that stockpiled ore. What we carry for that stockpiled ore in our recovery model is something in the order of 50%. However, it tends to be higher grade, so then -- and it's already been mined. So it ore because we -- the cost of mine that have already been incurred. So yes, that would be my answer to those questions.

[Cosmos Chiu]

Okay. And then maybe as a follow-up, Peter, how much of this stockpile material do you have? And I'm just trying to get a clear picture in terms of how the mix of the different ore types is going to be as you transition to La Yaqui Grande. In the meantime, there's also El Salto, I believe that's been now stripped maybe, and that should be coming in as well. So how should we look at it in terms of the mix of ore that's being stacked on the leach pad?

[Peter K. MacPhail, Chief Operating Officer]

Yes. So I mean as always, at Mulatos, we have a number of ore sources. There's still some Victor ore, there's still some San Carlos open pit ore. Those are going to wind down towards -- in the coming months. Cerro Pelon is winding down. Salto is going to be ramping up starting early next year, and it will come online more as the year progresses and the stockpiled ore. So between now and I would say mid-next year when La Yaqui Grande is on stream, about 50% of our ounces would be coming from the stockpiled ore.

[Cosmos Chiu]

And can you let me -- would you be able to tell me how much of the stockpile ore do you still do?

[Peter K. MacPhail, Chief Operating Officer]

It's in the range of 5 million or 6 million tonnes I think we had 9 million tonnes at the beginning of this year, and we've been processing it through the year. And I have to give the exact number, Cosmos, but we still have quite a stack of it.

[Cosmos Chiu]

Okay, for sure. And then maybe switching gears to cost here. As you mentioned, the leach pad now needs -- has -- will experience an increase in cost due to higher reagent usage and cost. Maybe breaking it down, how much more reagent does these stockpile ore need? And how much cost increase are you anticipating for this reagent? Which ones a larger portion of that cost/income?

[Peter K. MacPhail, Chief Operating Officer]

So I mean it requires more lime and cyanide to be specific. Those are -- and caustic as well. So just about everything we put on there is increased for this stockpiled ore. And it's different zones of the stockpiled ore have different requirements. But if I were -- and we're going through our planning process for next year now. So I mean we'll come out with guidance in due course. But what we're seeing is those ounces are probably coming in at somewhere in the range of an all-in sustaining cost of maybe in the 1,500-ounce range for that 50% of our production for the next 6 or 8 months. And -- but part of that cost is noncash because of the associated cost of building that stockpile. So I think there's a couple of hundred dollars or thereabouts that's noncash. So I mean they still make good money, but there you go.

[Cosmos Chiu]

Great. And maybe in terms of a broader question here following up on that, Jamie, as you mentioned, you've managed costs really well in the first 3 quarters, but there are inflationary pressures on operating costs in the industry. And so we should be expecting some increases -- some impact in Q4 and into 2022. We've just talked about Mulatos and some of the reagent costs. But where are you seeing some of the inflationary pressures? Is it in Mexico? Is it in Canada? Is it in the reagent costs? Is it in labor? Or is it just everything?

[James R. Porter, Chief Financial Officer]

Yes. Cosmos, it's Jamie. We've just gone through our budgeting process, and I think it is really across the board. I mean across all of our operations, we're seeing slightly higher expected labor increases than what we would have had in past years. Obviously, the diesel price has increased, and certain consumable costs grinding media, anything to do with steel has gone up in some cases significantly. So a lot of our input costs have been subject to multiyear purchase contracts that are expiring. And so we are seeing an uptick. I think across the industry, from an operating cost perspective, it's in the 5% to 7% range. And I'd say our experience has been consistent with that.

[Operator]

The next question is from Mike Parkin from National Bank Financial.

[Michael Parkin, Mining Analyst]

One, going back to Mexico. Cerro Pelon, you're indicating that will be depleted in the fourth quarter? Is it expected to kind of be a full quarter of tonnage or kind of a half quarter?

[Peter K. MacPhail, Chief Operating Officer]

Yes. We're -- it will be at some time in November that we wind up mining there, but the ounces will continue to come off through the quarter.

[Michael Parkin, Mining Analyst]

Right. Okay. And then just kind of revisiting inflationary kind of comments. As you're kind of ramping up the Phase 3 expansion, can you just remind us in terms of like what additional manpower you have to bring on through contractors and how you're finding that availability? We're hearing bit of labor market tightness in Canada. And are you seeing any signs that the higher diesel price is starting to kind of revive demand of the oil patch for people and increasing competition for staff there?

[Peter K. MacPhail, Chief Operating Officer]

Yes. On the contractor side, I mean, yes, I would say we are -- as everyone is, the labor market is tightening up. It hasn't hurt our Canadian operations. It hasn't hurt any of our operations, frankly. Our turnover rate hasn't gone up appreciably kind of year-over-year for the last number of years. As we need to bring on contractors for various things, I mean, sinking a shaft is not a lot of people. It's a lot of time. And so we've now awarded that contract to Redpath. I think we can say that. I don't think that's confidential. And they have a good supply of contractors, a lot of them Canadian-based that like to work in their home country and close to home. So I think that will be fine. Building a paste plant or expanding a mill, those will also be contractors and will be contracting with outfits that will supply those folks. So we haven't -- if it's tougher to get people, the costs associated with that may go up a little bit. So were not quite there in our contract letting yet, but we have secured the shaft sinking portion of this, and we're not seeing any concerns with that.

[Michael Parkin, Mining Analyst]

All right. And then just one more down in Mexico. What should we be kind of modeling for a rehandle cost of the stockpiles there on $1 per tonne basis?

[Peter K. MacPhail, Chief Operating Officer]

Yes. It's around USD 1 a tonne.

[Michael Parkin, Mining Analyst]

And can you -- it's been a while since I've visited, but diesel prices used to be kind of independent of spot market in Mexico. Is that still the case where the government still dictates how prices kind of change year to year?

[Peter K. MacPhail, Chief Operating Officer]

You want to take that, James?

[James R. Porter, Chief Financial Officer]

Yes. Yes. No, I think you're right. I mean we pay to Pemex the state monopoly, but I think the current rate we're paying is more consistent with market prices.

[Operator]

[Operator Instructions] The next question is from Kerry Smith from Haywood Securities.

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

The first question I had maybe for Peter is with this slower leach cycle and the higher reagent costs for that stockpiled ore at Mulatos. Is there any concern that maybe the ultimate recovery on that material won't get to what you're targeting and maybe the reagent cost will actually be higher on average over the course of time? Or are you thinking it's still going to be a similar recovery to what you sort of expected just going to take longer?

[Peter K. MacPhail, Chief Operating Officer]

Yes. There's -- so a couple of things going for us. I mean, yes, so the reagent costs are higher on that stuff as it's been sitting there longer sulfidic ore. You need to put more line on it, more cyanide on it to reach the gold. It is also higher grade. So that's going for us. Recoveries are also -- maybe not as bad as what we put it down there. So there's a lot of things that play there of that whatever we have 7 or 8 -- 6 million or 7 million tonnes left of stockpiled ore there. Is there a portion of that, that is too low grade or low recovery or high reagent costs to process? There's a chance of that, but we won't put it on the pad if it doesn't make sense.

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

Okay. Okay. So you're not really that concerned about it? It is a bit slower, but you're not worried that you're going lose stockpile.

[Peter K. MacPhail, Chief Operating Officer]

Yes. It's lower because it's sulfide. It's lower recovery because it's sulfide. It's higher cost because it's sulfide. Yes. I mean it's just -- it's going to be -- it's going to cause us a lumpy couple of quarters, but then we'll be lumpy in the other direction with the La Yaqui Grande. It's going to be booming. So.

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

Right. Okay. Okay. That's helpful. And then maybe for Jamie, just on the $137 million of CapEx at La Yaqui Grande. Can you remind me how much of that was the pre-strip? And how much of that pre-strip is actually done as of today? I think you gave them the [ full close ] or how many times you've moved. I'm just wondering percentage was how much of that pre-strip is actually done?

[James R. Porter, Chief Financial Officer]

So yes, about 75% of the total capital cost of La Yaqui Grande was pre-stripped. And in terms of our percentage completion on that, I don't have that number in front of me, Kerry. But we're on track and on schedule. As Peter said, once La Yaqui Grande comes online, we'll be -- production is going to increase pretty dramatically and our costs are going to be cut in half. And we remain on schedule and even better, we remain on budget like we're consistent with our capital budget there. We're not seeing any cost overruns.

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

Okay. Okay. That's awesome. And then, Peter, can you elaborate a bit more on what the issue was with the mill?

[Peter K. MacPhail, Chief Operating Officer]

Yes. So I mean, a couple of power bumps and fried motors and send it out CIL tanks that take days to un-sand by hosing them out, followed by getting it back up and running, burning out pumps and waiting for new pumps to show up. It was just -- it was unfortunate. And we are now -- we have like many spare pumps on site to deal with any similar thing in the future. So it is a -- I mean that build was built in 1985, and it's been expanded a few times, and we're going to expand it again. And -- but we're -- we'll expand it really good this time.

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

Kerry, if I have anything to say about it, we're not going to expand it again. We're -- just because going to make that clear. We're debating that right now, and we're waiting for the numbers to come in by the end of this quarter. And I'd like to think it's going to go a lot better than that. Operator, are there any further questions?

[Operator]

My apologies. 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 416-368-9932.