Alamos Gold Inc

TSX:AGI

Earnings Call Transcript 2017-Q4

[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 thanks to everyone for attending Alamos' Fourth Quarter 2017 Conference Call. In addition to myself, we have on the line today John McCluskey, President and Chief Executive Officer; and Peter MacPhail, Vice President and Chief Operating Officer. To address any questions with respect to our reserve and resource update, we also have on the line today Aoife McGrath, our Vice President of Exploration; and Chris Bostwick, our Vice President of Technical Services. 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 of the dollar amounts mentioned in this conference call are in United States dollars unless otherwise noted.Now John will provide you with an overview.

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

Thank you, Jamie, and good morning, everyone. We closed 2017 on a strong note, achieving record quarterly production of 120,300 ounces, record annual production of over 429,000 ounces and a significant reduction in costs. This translated into our best financial performance in years. We also greatly improved our outlook over the past year through various strategic initiatives, including the acquisition of the Island Gold mine, the elimination of debt and the advancement of our growth projects. Operationally, we met or exceeded production guidance at all of our mines in 2017. We also met cost guidance with an 8% reduction in all our -- in all-in sustaining costs to $933 per ounce. This drove record mine-site free cash flow to $78 million for the full year, up nearly 120% from 2016. This included a record $34 million from Young-Davidson, which had a breakout year achieving several new milestones. We expect this strong operational performance to continue into 2018. With the addition of Island Gold, we are expecting gold production to increase a further 16% to a new record. We expect production for 2018 to fall between 480,000 ounces and 520,000 ounces. Island Gold has solidified our operating base, giving us a third core producing mine that will anchor this company well into the future. We expect to produce at least 500,000 ounces per year in 2019 and 2020 from our existing operating mines, with significant cost improvements expected to drive improving margins and cash flow. We had a good year on the development front, highlighted by the construction of La Yaqui Phase I, which came in ahead of schedule and on budget; the start-up development activities at Kirazli; and the completion of 3 positive feasibility studies. These studies outlined more than 400,000 ounces of combined annual production potential and highlight the type of high-return internal growth opportunities we possess. Kirazli is the highest-return project in the pipeline. We expect to ramp up full-scale construction in the spring, following receipt of our GSM permit. Kirazli is expected to produce more than 100,000 ounces a year in its first full year of production, bringing company-wide production to over 600,000 ounces while further lowering our cost profile. We had another solid year with global reserves increasing by 2 million ounces, driven by the addition of Island Gold and increases at Lynn Lake and La Yaqui Grande. Over the past 2 years, we've added 4 million ounces of reserves, which now approach 10 million ounces. This gives Alamos high-quality, long-life reserves located in some of the best jurisdictions in the world. In particular, the reserve growth at Island Gold continues to demonstrate potential and quality of the deposit. Island Gold's reserves grew another 18% from the end of 2016 while grade increased a further 11% to over 10 grams per tonne. Since 2014, reserves have increased by nearly 400%, with grades increasing 60%. We see more growth potential in the years to come. With a stable base of 3 high-quality operating mines, improving margins, peer-leading growth and solid debt-free balance sheet, Alamos has never been better positioned to deliver sustainable shareholder value over the long term. I'll now turn the call over to our CFO, Jamie Porter, to comment on our fourth quarter 2017 financial performance. Jamie?

[James R. Porter, Chief Financial Officer]

Thank you, John. As John mentioned, our financial results continue to improve every quarter. We took a number of important steps in 2017 that helped us to achieve this result. Retiring the high-yield notes and eliminating $24 million in annual interest costs has dramatically improved our earnings. Higher production and gold sales and improved margins resulting from the Richmont acquisition are expected to drive continued growth in both earnings and cash flow. Our financial results for the fourth quarter include only about 5 weeks of results from Island Gold given we closed the acquisition in late November. In the fourth quarter, we sold approximately 127,000 ounces of gold at an average realized price of $1,275 per ounce for record quarterly revenues of $162 million. Annual revenues reached a record $543 million. Our margins continued to improve with total cash cost of $753 per ounce and all-in sustaining cost of $902 per ounce in the fourth quarter, both down more than 10% from a year ago. All of our operations were again free cash flow positive in the fourth quarter, generating $37 million of mine-site free cash flow. For the full year, we generated a record $78 million of mine-site free cash flow, more than doubling the $35 million in 2016. Young-Davidson was a big driver of this growth, the operation continuing to establish new records. We reported a loss of $4.7 million in the fourth quarter or $0.01 per share. Our earnings were impacted by a number of onetime items, most of which related to the Richmont acquisition. These adjustments included $5.1 million of transaction costs related to the acquisition, a fair value accounting adjustment at Island Gold of $4.1 million and unrealized foreign exchange losses of $5.1 million. These adjustments total $14.3 million and impacted earnings by $0.04 per share.Note that amortization per ounce has increased with the acquisition of Richmont and the Island Gold mine. Amortization per ounce for the fourth quarter of 2017 was $324 an ounce and increased from the full year amount of $292. On a go-forward basis, amortization is expected to approximate $350 per ounce.Operating cash flow before changes to noncash working capital is $52.7 million or $0.16 per share for the fourth quarter and $183.3 million or $0.60 per share for the full year. We've demonstrated strong earnings and cash flow growth over the past 2 years, both on an aggregate and per-share basis. Capital spending totaled $39 million in the fourth quarter and $163 million for the full year, with capital spending in each of our operating mines in line with guidance. Capital spending at our operating mines in 2018 is expected to be in a similar range of $146 million to $165 million. Spending in our development projects, including capitalized exploration, is expected to total $146 million in 2018. This includes $100 million for the construction of the Kirazli project, of which of 80% is contingent upon the receipt of the GSM permit.Our corporate G&A expense remains among the lowest in our peer group, with $4.6 million incurred in the fourth quarter and $15.5 million for the year, down from 2016 levels and ahead of guidance. We remain debt-free and possess one of the strongest balance sheets in the industry. At the end of 2017, we had $237 million of cash and equity securities, up from $168 million at the end of September. With our undrawn revolver, we have more than $637 million in available liquidity, and combined with growing cash flow from our operations, we are in excellent shape to fund our strong pipeline of growth projects internally. Now I'll turn the call over to Alamos' COO, Peter MacPhail, to walk through operations.

[Peter K. MacPhail, Chief Operating Officer]

Thank you, Jamie. Young-Davidson delivered a breakout performance with record quarterly production of 56,500 ounces and record annual production of 200,000 ounces, beating full year guidance. This represented an 18% increase from 2016, driven by higher underground mining rates and grades, along with higher mill throughput. Mine-site all-in sustaining costs were $859 per ounce for the quarter and $834 per ounce for the full year, the latter down 7% from a year ago. Gold production at Young-Davidson is expected to range between 200,000 and 210,000 ounces in 2018, driven by further increase in underground mining rates, which are expected to average over 7,000 tonnes per day for the full year. Mulatos has had another solid year, producing 42,700 ounces of gold in the fourth quarter and 160,000 ounces for the full year, achieving the top end of guidance. This included approximately 10,000 ounces from La Yaqui Phase I, with initial production ahead of the schedule and on budget by the end of August. Mine-site all-in sustaining cost in the quarter were $798 per ounce and $835 per ounce for the year, a significant improvement from 2016, reflecting higher-grade stock, a lower strip ratio and lower-cost production from La Yaqui Phase I. We expect production to be in a similar range of 150,000 to 160,000 ounces over the next several years, with declining costs in 2019 and beyond, reflecting the end of the 5% royalty and the installation of the power grid at Mulatos. Collectively, we expect these 2 items to save us nearly $100 per ounce at current gold prices. A key focus over the next year will be advancing development of both Cerro Pelon and La Yaqui Grande, with production from these higher-grade projects expected in 2020 and 2021, respectively. Including these deposits, we have a mineral reserve life of 8 years in the Mulatos district. With an excellent track record of exploration success, significant untapped potential across the district and another $13 million budgeted for exploration in 2018, we expect to be mining the district well over a decade from now. Island Gold had another record year as the operation continues to grow and improve in every respect. The mine produced 22,100 ounces of gold in the fourth quarter, of which 9,000 ounces was attributable to Alamos following the close of the acquisition. Full year production of 98,600 ounces was up 18% from 2016, beating production guidance and establishing a new record. Underground mining rates averaged around 1,000 tonnes per day in the fourth quarter and for the full year, with similar rates expected in 2018. Milling rates averaged 930 tonnes per day in 2017 and are expected to increase to 1,100 tonnes per day following completion of the Phase 1 mill expansion in the second half of this year. Island Gold is expected to produce between 90,000 and 100,000 ounces in 2018. Looking ahead to 2019, the combination of higher throughput and grade is expected to drive a significant increase in production and reduction in costs. Combined with lower capital, we expect a healthy increase in free cash flow from the operation. El Chanate produced 12,100 ounces in the fourth quarter and 60,400 ounces for the year, with mine-site all-in sustaining cost averaging $1,218 per ounce. El Chanate is expected to produce between 40,000 and 50,000 ounces in 2018, with mining activities expected to wind down by the middle of 2018. Given its long leach cycle, we expect ongoing production and higher mine-site free cash flow in the second half of '18 and into 2019. We expect our current operating mines to produce at least 500,000 ounces in 2019 and beyond, low-cost production growth from Island Gold replacing higher-cost production from El Chanate. We expect declining costs over the next few years driven by key improvements at all 3 of our core operations, including completion of Phase 1 expansion at Island Gold; the end of the 5% royalty at Mulatos in 2019; and higher underground mining rates at Young-Davidson in 2020, following completion of the tie-in of the upper and the lower mine. Combined with the declining rate of capital spending across these operations, we expect additional free cash flow growth over the next few years. Development activities at Kirazli continue, including tree clearing, road relocation and power line construction. We've also broken ground on the construction of the water reservoir and selected our mining civil works contractor. We expect to ramp up major contraction activities during the more favorable spring weather. With that, I'll turn the call back to John.

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

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

[Operator]

[Operator Instructions] And the first question is from Rahul Paul from Canaccord Genuity.

[Rahul Thomas Paul, Director]

At La Yaqui Grande, it's good to see continued reserve growth with the grade holding together as well. What is the strip ratio associated with the reserve base as it stands right now?

[Peter K. MacPhail, Chief Operating Officer]

It's in the range of 6 to 7, Rahul.

[Rahul Thomas Paul, Director]

And then just a follow-up on that. I mean, are you seeing the strip ratio coming down with additional drilling? In particular, are we seeing the pre-strip requirements coming down?

[Peter K. MacPhail, Chief Operating Officer]

It came down marginally from the last round, and that's probably where it will be.

[Rahul Thomas Paul, Director]

Okay. And then can you remind me as to how much metallurgical testing you've done so far? And what kind of results are you seeing?

[Peter K. MacPhail, Chief Operating Officer]

Yes. So we've tested all of the materials that's in the resource and the reserve, and we're seeing very good metallurgy, very similar to the La Yaqui Phase I, which, I think, we're budgeting at 75, but seeing a bit more.

[Rahul Thomas Paul, Director]

That's helpful. And then, John, just in Turkey, has anything changed that gives you either greater confidence or lesser confidence that you'll receive permit soon? Or is it still the same, just waiting for a response?

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

Yes, nothing has really changed. We're -- As you say, we're just waiting for them to go through their approval process.

[Operator]

The next question is from Michael Gray from Macquarie .

[Michael J. Gray, Gold Analyst]

I've got a question for Aoife on down plunge south sea -- southeast, the main mineralization on Island Gold. Fairly bullish commentary in the resource update. New zone having an area of potential. And for mineral resources, similar dimensions to the phase 1 PEA expansion area. Could you just expand on that a little bit in terms of what you're seeing in that area and whether we're going to be getting relatively regular updates vis-à-vis drill results?

[Aoife Mairead McGrath, Vice President of Exploration]

Michael, yes. When we look at the overall area of PEA, and we compare the area that we're now drilling to the southeast, they are very similar in size. And when you look at a snapshot of results when we started drilling that out in -- or back to even 2010, we're getting similar grades to what we're seeing now overall. The geology looks very similar. We're intersecting the same veining and alteration, and it appears that it's continuing to down plunge in the same way. It even appears from the -- there's very few holes that have -- we've drilled out there that have missed. There's 1 or 2 where we hit it in a slightly different place due to some dikes coming across. But all the indications are that grading continues pretty strongly there and plunged to the southeast. So we're very encouraged by what we're seeing.

[Michael J. Gray, Gold Analyst]

Okay. And at one point, there was -- I think Richmont was interpreting some flatter veins in addition to steeper ones. Has that been resolved yet? Or is that a work in progress?

[Aoife Mairead McGrath, Vice President of Exploration]

That's a work in progress. We're doing a big -- we've just commenced a big structural and alteration study up there, and we're getting a -- pursuing a few lines of inquiry on the geology there at the moment as well. So that's a work in progress.

[Michael J. Gray, Gold Analyst]

Okay. And final question is on the $15 million, 84 kilometers of drilling for Island. What's the rough breakdown on that in terms of infill versus expansion and kind of where the -- distribution? I know you are going to do a first-pass test on the 5- to 6-kilometer strike as well.

[Aoife Mairead McGrath, Vice President of Exploration]

Yes. We have pure exploration drilling as opposed to delineation -- or sorry, and infill that's coming under more mine geology. We have 84,000 meters for exploration. Of that, 54,000 are surface and 30,000 are some underground. Most of the surface drilling -- or a high proportion of the surface drilling is going to be the deep directional. But there's about 15,000 of that, that's a long strike and hitting other targets other than the down plunge continuity. So the extension to the east, a long strike, is 6 kilometers and a couple of other targets to the west as well.

[Operator]

The next question is from Lawson Winder from Bank of America Merrill Lynch.

[Lawson Winder, Associate]

Just first on the Kirazli CapEx. So assuming no GSM permit, at what point in 2018 will that $20 million of capital spending for Kirazli be complete?

[James R. Porter, Chief Financial Officer]

Lawson, it's Jamie. So the $20 million is our budget without the GSM, so that's the spending on some of the works that we're doing currently on the road relocation, on the reservoir construction, on bringing power to site. So that will be incurred throughout the year. But the majority of it would be done probably by the end of Q3.

[Lawson Winder, Associate]

Okay. That's great. And then on the YD cost per tonne, so you guys -- it was $44 in Canadian dollars in Q4. So it was just a slight increase over Q3. And it would just be really helpful to get an idea for what kind of moving parts were on that increase versus Q3, especially considering that the throughput was up a little bit.

[James R. Porter, Chief Financial Officer]

Yes. Sorry, go ahead.

[Peter K. MacPhail, Chief Operating Officer]

Yes. Lawson, it's Peter. So every quarter, it will be up and down a bit based on how much of that work came from development sources versus stoping. The stoping ores are cheaper than the development ores. So it kind of fluctuates from quarter-to-quarter, but, over time, it's flat there.

[James R. Porter, Chief Financial Officer]

Yes. I think our budget for 2018 is in and around that $44 per tonne level. And then once we get up to, a couple of years out, we're at 8,000 tonnes per day, we'd expect to see that drop down to $40 or even below.

[Operator]

The next question is from Kerry Smith from Haywood Securities.

[Kerry Smith, VP & Senior Mining Analyst]

Peter, will we get some kind of an engineering study at some point this year on La Yaqui Grande then?

[Peter K. MacPhail, Chief Operating Officer]

No, I don't think we'll be putting out a study on it. We'll treat it like we did La Yaqui Phase I and other deposits that we've mined in Mulatos. We pretty much set the mining costs. But I don't think we're planning on putting out a 43-101 or anything like that. It'd be more maybe we do something -- a tour or something like that, but I don't think we're putting it in formal.

[Kerry Smith, VP & Senior Mining Analyst]

Okay, yes. No, I was thinking more like the rough parameters of how you might actually mine the deposit, not necessarily a 43-101 though.

[Peter K. MacPhail, Chief Operating Officer]

Yes. Well, we're going to -- it's going to be assembled on heap leach right beside that they are very similar to the Phase 1, but just bigger, nothing special.

[James R. Porter, Chief Financial Officer]

Yes. I think once we have all the detail around the capital spending and the throughput rates and everything else, that would likely be disclosed in a quarterly press release or it might be more of a separate stand-alone press release.

[Kerry Smith, VP & Senior Mining Analyst]

Okay. So -- and would we maybe see that this year, I guess, is what I'm wondering.

[Peter K. MacPhail, Chief Operating Officer]

Well, we're going through the permitting on it. So that's -- we're doing the engineering currently to support that permitting. So yes, probably by the end of the year, we'll be in a position to give more detail.

[Operator]

[Operator Instructions] And your next question is from Cosmos Chiu from CIBC.

[Cosmos Chiu]

I have an accounting question here actually. There was quite a bit of accounting noise in Q4 2017, in part related to the Richmont acquisition. It sort of resulted in a loss of $0.01 per share, lower than consensus. I think that's the reason why share price is down today. I guess my question is, should we be expecting more accounting noise in 2018 related to the Richmont acquisition? I don't think so, given that I think -- I've looked into your financial statements. It looks like the purchase price adjustment has been completed. You have a year to sort of confirm it, but I don't think I would expect any more changes. And in comparison to your previous acquisition or the merger with AuRico, I would imagine this is a bit less complicated given that, with AuRico, you took out AuRico's books as a basis, but not this time around. But I just want to make sure. In terms of potential for accounting noise in 2018, how should I look at it from the perspective of the Richmont acquisition?

[James R. Porter, Chief Financial Officer]

Yes. It's Jamie here. You shouldn't expect any noise related to the transaction or acquisition coming in, in 2018. It was all booked in the fourth quarter. And I mean, the transaction cost was split between Richmont's books, between the Alamos' books and between our production and the cash that came over. So it wasn't that complicated, but we did try to specifically outline what those adjustments were. And what impacted earnings in the fourth quarter was the $5.1 million that's spelled out in the press release. The other -- I mean, the major impact going forward from the acquisition is on our amortization. With the addition of Island, it carriers a higher amortization charge of around $400 an ounce. So you'll see our blended overall amortization on a per-ounce basis go up to in and around that $325 to $350 range.

[Cosmos Chiu]

Okay. So that could potentially -- given that you need to take depreciation on the higher value of the acquisition cost, you need to depreciate at a higher rate. So that could potentially impact the EPS, but we should model that into it.

[James R. Porter, Chief Financial Officer]

Yes, that's exactly right. If you look at our financials, they're cleaner now than they have been in years. So going forward, we don't have -- our interest expense is minimal, and there won't be any other accounting adjustments related to this stuff going forward other than just the all standardized FX adjustments that go through every quarter, but those are typically adjusted out anyways. So yes, it should be good.

[Operator]

There are no further questions at this time. This will conclude today's conference call. If you have any further questions that have not been answered, please free to contact Mr. Scott Parsons at [phone], extension 5439. Thank you for your participation.