Alamos Gold Inc

TSX:AGI

Earnings Call Transcript 2019-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, everyone, for attending Alamos' Fourth Quarter 2019 Conference Call. In addition to myself, we have on the line today John McCluskey, President and Chief Executive Officer; Peter MacPhail, Vice President and Chief Operating Officer; and Scott R.G. Parsons, our Director of Exploration for Canada. To address any questions with respect to our reserve and resource update, we also have on the line today Chris Bostwick, our Vice President of Technical Services. 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. The 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 United States dollars unless otherwise noted. Now I'll turn it over to John to provide you with an overview.

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

Thank you, Jamie. We ended 2019 on a strong note in what was a successful year for Alamos. We delivered on our operational objectives driving record financial performance, advanced the lower mine expansion at Young-Davidson and continued to grow reserves and resources at Island Gold. With another solid performance from our Canadian operations in the fourth quarter, we met full year production guidance for the fifth consecutive year, producing 495,000 ounces of gold. We also met our full year cost guidance with a 10% decrease in our total cash costs to $720 per ounce and a 4% decrease in all-in sustaining costs to $951 per ounce. Combined with a stronger gold price, this translated into record operating cash flow of $86 million in the fourth quarter and a record $297 million for the full year. We are now in the final stages of the lower mine expansion project at Young-Davidson. We are 4 months away from our -- from starting to see our full potential of the operation with the lower mine expansion on track for completion in June. Island Gold had another record performance, exceeding guidance with production of 150,000 ounces, a 42% increase from 2018. Island Gold has now set a new production record for 5 consecutive years. The operation generated record free cash flow of $65 million in 2019. We had an excellent year on the exploration front with another significant increase in reserves and resources at Island Gold, totaling over 900,000 ounces across all categories. Since we acquired Island Gold in November 2017, combined reserves and resources have doubled to now total 3.7 million ounces net of depletion. The majority of this reserve and resource growth will be incorporated into a Phase 3 expansion study, which we expect to showcase early in June, and we expect it will show that this will be a large, highly profitable and long-life operation. The reserve growth primarily at Island Gold replaced mining depletion over the last year, with our global reserves holding steady at just under 10 million ounces in our year-end update. Within our growth projects, we completed construction of Cerro Pelon during the fourth quarter and achieved initial production ahead of schedule and under budget. In Turkey, construction activities in our Kirazli project remain on hold pending the renewal of our mining concessions.2020 will be a transformational year for Alamos with a number of key near-term catalysts. This includes the results of the Phase 3 expansion study at Island Gold and the completion of the lower mine expansion at Young-Davidson, which are both expected in June, followed by the transition to strong company-wide free cash flow growth. This free cash flow growth is expected to continue into 2021, with production from our existing operations increasing to approximately 500,000 ounces at lower costs. Reflecting this strong outlook, we increased our dividend by 50% in December. We have tripled the dividend since 2018 and expect to provide further increases as we generate stronger free cash flow. I'll now turn the call over to our CFO, Jamie Porter, to review our financial performance.

[James R. Porter, Chief Financial Officer]

Thank you, John. Moving on to Slide 4. We had a strong quarter and year from a financial perspective. We sold 494,700 ounces of gold in 2019 and generated record revenues of $683 million. The performance at our Island Gold mine was the highlight as the operation continued to impress with record free cash flow of $65 million in 2019. Since we acquired Island Gold at the end of 2017, the mine has generated $81 million in free cash flow net of all capital spending and a $35 million investment in exploration.In the fourth quarter, revenues were $186 million from the sale of 127,000 ounces at an average realized price of $1,463 per ounce. Gold sales were 5,000 ounces higher than our production in the quarter with deferred sales from earlier in the year benefiting the fourth quarter. Total cash costs of $722 per ounce were in line with guidance and all-in sustaining costs of $972 per ounce were modestly higher than guidance with some catch-up of capital spending occurring in the fourth quarter. Our full year total cash costs and all-in sustaining costs were both in line with guidance. Operating cash flow before change in the noncash working capital was $86 million, marking the third consecutive quarterly record. On a per share basis, operating cash flow has grown $0.02 per quarter in each of the last 4 quarters from $0.14 in the fourth quarter of 2018 to $0.22 in the fourth quarter of 2019. This was driven by an 18% increase in the realized gold price and a 6% decrease in total cash costs. For the full year, operating cash flow before changes to noncash working capital was a record $297 million or $0.76 per share, a 40% increase from 2018. Our fourth quarter reported net earnings of $38 million or $0.10 per share included unrealized foreign exchange gains of $9 million, partially offset by other onetime losses totaling $3 million. Excluding these items, our adjusted net earnings were $32 million or $0.08 per share. Capital spending totaled $73 million in the fourth quarter. This included $23 million of sustaining capital, $44 million of growth capital and $6 million of capitalized exploration. For the full year, capital spending totaled $264 million, which was in line with revised guidance. We ended the quarter with no debt and approximately $206 million in cash and equity securities, up slightly from the previous quarter, reflecting positive free cash flow generation. We remain well positioned to fund our internal growth initiatives. In December, we announced a 50% increase in our quarterly dividend to an annual rate of USD 0.06 per common share starting this quarter. This is a direct reflection of our strong free cash flow look as we complete the lower mine expansion at Young-Davidson. From a capital allocation perspective, we remain focused on returning capital to our shareholders, having tripled the dividend over the past year and repurchased 2.7 million shares at a cost of $11 million under our share buyback program. I'll now turn the call over to our COO, Peter MacPhail, to provide an overview of our operations.

[Peter K. MacPhail, Chief Operating Officer]

Thank you, Jamie. Moving to Slide 5. Our Canadian operations continue to perform well in the quarter. Young-Davidson produced 48,000 ounces in the quarter and 188,000 ounces for the full year, near the top end of guidance. Mining rates increased to 7,000 tonnes per day in the quarter and averaged 6,700 tonnes per day for the full year, exceeding guidance and marking an 8% improvement from 2018. Total cash costs of $766 per ounce in the fourth quarter were in line with guidance and virtually unchanged from a year ago. Mine site all-in sustaining costs of $1,083 per ounce were higher than guidance, reflecting higher sustaining capital spending in the quarter. On Slides 6 and 7, you can see the progress we are making on the lower mine expansion, with the completion of several critical path items in the fourth quarter, including the ore passes from the upper mine to the lower mine course ore bin, the shaft bottom steel, the ore and waste bins at the Northgate shaft and 8940 level loading pocket. In addition, all 3 fine ore bins have been excavated and 2 bins at the Northgate shaft are currently being commissioned. The installation and commissioning of the crusher will be completed this month and the installation of the grizzlies and rock breaker will be completed in the second quarter. The Northgate shaft was shut down in mid-February and removal of the ropes has commenced. As previously guided, ore from the upper mine will be trucked to surface for processing at a reduced rate of approximately 2,500 tonnes per day, while the Northgate shaft is down. During this time, the shaft steel at the mid shaft location will be removed, the pentice between the upper and lower mines excavated and the new head, tail and guide ropes installed. We remain on track to start hoisting from the lower mine in June. We expect mining rates to ramp up to 7,500 tonnes per day by the end of 2020. As previously guided, we expect production at Young-Davidson to range between 145,000 and 160,000 ounces in 2020, reflecting the downtime for the tie-in and expect the higher mining rates to drive production in excess of 200,000 ounces in 2021 and beyond. Over to Slide 8. Island Gold produced 38,600 ounces in the fourth quarter, a 33% increase to the fourth quarter of 2018, primarily reflecting a 44% increase in mill grades. Mining rates increased from earlier in the year to average 1,116 tonnes per day, consistent with annual guidance. For the full year, Island Gold exceeded guidance with record production of 150,000 ounces of gold.Total cash cost of $507 per ounce were down 11% from a year ago, reflecting higher grades mined and processed. Mine site all-in sustaining costs of $653 per ounce were below annual guidance, reflecting lower sustaining capital in the quarter. In 2020, we expect Island Gold to produce between 130,000 and 145,000 ounces. We continue to see excellent exploration results at Island Gold, which has doubled the reserve and resource base over the past 2 years. This growth is being incorporated into the Phase 3 expansion study of the operation with results expected to be released in the second quarter of 2020. Following my remarks on the operations, Scott Parsons, Director of Exploration Canada, will provide a summary of the ongoing success we are having at Island Gold. Slide 9. Mulatos produced 34,100 ounces in the fourth quarter at total cash cost of $820 per ounce and mine site all-in sustaining costs of $891 per ounce. Production and costs were impacted by the winding down of production from La Yaqui Phase I as well as abnormally high rainfall in September over a short period, which restricted mining activities in the main Mulatos pit during September and October. This impacted production in the second half of the year, resulting in full year production of 142,000 ounces coming in about 5% below guidance. This was partially offset by the start-up of Cerro Pelon with construction completed and initial production achieved ahead of schedule in the fourth quarter. In 2020, production of Mulatos is expected to increase to 150,000 to 160,000 ounces, consistent with long-term guidance. At our fully permitted La Yaqui Grande project, we are finalizing project design and economics and expect to announce a construction decision in the second quarter of 2020. I'll now turn the call over to Scott Parsons to discuss the reserve and resource update at Island Gold.

[Scott Parsons;Director of Exploration, Canada]

Thank you, Peter. We have an exceptional year of exploration drilling at Island Gold, resulting in significant growth in mineral reserves and resources totaling 921,000 ounces across all categories. As can be seen on Slide 10, mineral reserves increased 21% in 2019 to 1.2 million ounces, primarily driven by the conversion of inferred mineral resources at Island Main and East. A total of 361,000 ounces were added, more than offsetting mining depletion of 153,000 ounces. Mineral reserve grades also increased slightly to 10.37 grams per tonne from 10.28 grams per tonne.Moving to Slide 11. Deferred mineral resources also increased 46% or 725,000 ounces to 2.3 million ounces with a 13% increase in grade, driven by higher grade additions in Island East. This included an initial inferred resource of 301,000 ounces, grading 16.06 grams per tonne in last year's new area of focus. This area has not seen any drilling prior to 2019. We drilled 17 holes in this area during the year, with every hole intersecting the Main/Island Gold zone. This area remains open up and down plunge. So needless to say, we're very excited about the potential for further growth. With the 840 level exploration drift now over at the Western extent of this area, we'll have access to start targeting it from underground this year. We also increased inferred resources by 443,000 ounces in the lower portion of Island East, which now contains 720,000 ounces at 18.74 grams per tonne. This ore shoot also remains open laterally and up and down plunge. Testing the continuity of high-grade mineralization between these areas in the upper and lower portion of Island East will be an ongoing exploration focus in 2020. These new inferred mineral resources represent further additions to significant high-quality inferred resource base at Island, which has grown by 131% since the acquisition of Island Gold in 2017 to a total of 2.3 million ounces. At the time of acquisition, the inferred mineral resources at Island Gold totaled 1 million ounces. Since then, we've converted 830,000 ounces from mineral resources to mineral reserves, representing 83% conversion rate. In addition to the deferred resources that were converted to reserves, we continue to find new resources, having added 2.1 million ounces of high-grade inferred resources. We are confident that this rate of resource to reserve conversion will continue, given that inferred resources are contained within the same Island Gold structure that hosts the 1.2 million ounces of mineral reserves and is the focus of both current and past production. The style of mineralization and controls reserved from drilling are consistent between these areas, and these inferred resources have been drilled out to 50- to 80-meter spacing with the continuity of high-grade mineralization between holes. Moving on to Slide 12. Combined mineral reserves and resources now total 3.7 million ounces, which is more than double the 1.8 million ounces at the time of acquisition in November 2017, net 365,000 ounces of mining depletion. Our exploration team continues to be excited about the significant potential for further growth of mineral resources with the deposit open laterally and down plunge. We invested heavily in exploration at Island Gold over the last 2 years, spending $35 million. We continue to see excellent returns with a low discovery cost of $17 per ounce of inferred resource. We have budgeted a further $21 million for surface and underground exploration at Island Gold in 2020, a 24% increase for 2019. The focus of the 2020 program remains on defining new near-mine mineral resources in Island Main East and West areas across the 2-kilometer long Island Gold zone. The 2020 budget includes 46,000 meters of surface directional drilling, 30,000 meters of underground exploration drilling and 900 meters of underground exploration development. These underground exploration platforms provide access for both continued exploration and for subsequent follow-up infill joining, focused on upgrading mineral resources to mineral reserves. With that, I'll turn the call back to John.

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

Thank you, Scott. That concludes our formal presentation. I'll now turn the call over to the operator, who'll open the lines for your questions.

[Operator]

[Operator Instructions] Our first question comes from Fahad Tariq from Crédit Suisse.

[Fahad Tariq, Research Analyst]

Just a quick one on Kirazli. Any update on what's happening there? And can you remind us of the carrying cost, I recall it being $5 million, but I don't know if it was higher in Q4. So yes, just the latest on Kirazli and the carrying costs while it's not being constructed.

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

Yes, Tariq, this is John McCluskey speaking. We had slightly higher carrying costs in the fourth quarter because of some of the underlying permitting fees that came due that quarter. But typically, we're spending roughly $3 million a quarter to just maintain our -- just to maintain the status quo in Turkey. But that's not just Kirazli, that's across everything that we're doing. And that incorporates permitting fees and so forth as well. As far as change in status, there is nothing significant to report. Had there been, you -- rest assured, I would have mentioned it in my commentary right up front. We're working diligently behind the scenes to move the project forward. As you know, we're not trying to overcome something specific. There was nothing specific to the project that delayed us. It had everything to do with a whole slew of false allegations that were leveled against the project. And again, I don't think they had anything to do with the company as such and had everything to do with the opposition party trying to attack the ruling party. So we got caught in a cross fire there. And so the situation -- the problem is more political than anything else, and it's going to require a political solution. And from what we're experiencing, political solutions take time, but we're working on getting that done. And we're getting some good assistance from the Canadian government, I might add, who strongly support us. There's a new Canadian Ambassador in Turkey as of November. He's a tremendous asset to our country, and he's doing a great job for us in Turkey.

[Fahad Tariq, Research Analyst]

And just as a quick follow-up, are you seeing kind of continued support from the local community there in terms of maybe them reaching out to their like government representatives and trying to -- because my understanding was the local community is supportive, but there's other protesters outside of that community that are opposing the project.

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

The local community has remained very supportive of the project. They have a great deal to gain by the project going forward. The level of protesters are very, very few. There's no protest going on as such. There's a couple of diehards that remained camped about a kilometer or 2 away from the mine site in proximity to the village of Kirazli where they can keep warm and get fed and so forth over the course of the colder period in Turkey here. I would say that we can rely on continued support from the local community, although the layoffs that we announced in the fourth quarter certainly didn't help those communities very much. They were inevitable, but one of the reasons why we're working diligently to get things back on track is so that we can bring those people back to work again and get the project moving forward.

[Operator]

Our next question is from Mike Parkin from National Bank.

[Michael Parkin, Mining Analyst]

Congrats on the really impressive update here on the resources for Island. This seems to definitely leaning towards getting quite interesting at depth. The Phase 3 decision next quarter, I would think kind of leans towards adding a shaft. Could you -- just in terms of -- walk us through what the permit process and kind of time line would potentially be, if it were to be a shaft that you decide to move ahead with there?

[Peter K. MacPhail, Chief Operating Officer]

Yes. Thanks, Mike. Yes, you've hit it right on. I mean the success we've -- let me just back up a bit. Over the course of the last 2 years, we've upped the gold reserve and resource base from about 1.8 million, doubled it to 3.7 million now. Doesn't show signs of abating either. So getting our arms around -- at the same time, the grade has increased. Reserve grade increased and resource grade increased. So we're up to 13.26 resource grade and 10.37 reserve grade currently. We mentioned the fact that these resources are extremely high-quality resources. I mean there's lots of resources out there and lots of projects that are resources for a reason because they need a higher price or they need something. These resources just need further drilling, and they will convert -- they've been converting at greater than 80% over the course of this -- the existing operation's life. So that will continue almost for sure. So what we have here is a deposit that's now looking like 3.5 million ounces going to 5 million ounces and -- going to last for a very long time. How do we want to best tackle that? And it's probably at a higher rate than 1,200 tonnes a day. We're mining at 1,200 tonnes a day now. We are permitted to mine at 1,200 tonnes a day. We will need to go through a permitting exercise to increase that. And that permitting exercise will probably take a couple of years because everything takes a couple of years in Canada to permit. But it's a well-known process, and there's very little chance that it won't happen. So we'll probably take a higher-end look at what we want to permit that because we only want to do it once. And we'll then gradually ramp up this operation to something significantly larger than it is now. What is that? We're in the process of determining that. Is it -- it's more than 1,200 tonnes a day. We've talked about 1,500 tonnes a day. We'll see. I don't want to prejudge this exercise that we're working on, but that's where we are. So it will take a couple of years to permit probably because it will be an increase in throughput. Maybe it's quicker than that, but it will be in that -- maybe it's 18 months. And then if there's a shaft, there'll be -- it takes a while to build a shaft. So this is -- this will be something that unfolds over the course of the next several years. It's not going to be a big capital hit anytime soon. If we decide to put a shaft in, it will be -- it will take us 2 years to put the shaft and it won't start until 1.5 years or 2 years from now. So -- if that's where it takes us. A ramp option is still viable to a certain point, but if you go beyond that, you probably are looking at a shaft.

[Michael Parkin, Mining Analyst]

Okay. And just going back to Slide 11 in the presentation. You outlined a pretty massive mineralized envelope. You've got a good chunk of that in resource. Can you just remind us where you're kind of building off new drill platforms for 2020 and 2021 and where on that Slide 11 you're kind of focusing?

[Peter K. MacPhail, Chief Operating Officer]

Yes. So these...

[Michael Parkin, Mining Analyst]

Kind of the 3 main corridors that you're open down plunge, is that where the focus of the drilling is?

[Peter K. MacPhail, Chief Operating Officer]

Yes. So we're working on the 840 level, our exploration drive now. You can see that one just above those blue inferred resource blocks. We're pushing that to the east. And as we get there, we get to then drill those for much tighter proximity and convert that from an inferred resource into a reserve once we get out there, and we're getting out there. We'll need a further one -- further down, ultimately, but we got to ramp further down to get there. So this is the kind of mine that will always have some significant amount of inferred resource in front of it that will convert as we get there. I would expect that you're always going to have at least half, if not more, of your -- of what you've got in your mine plan in inferred resource. Our mine plan now has -- goes out 15 years at 1,200 tonnes a day.

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

That's not unusual for underground mines.

[Peter K. MacPhail, Chief Operating Officer]

It's not unusual for narrower vein high-grade underground mines that need space drilling to convert into a reserve.

[Operator]

[Operator Instructions] Our next question comes from Kerry Smith from Haywood Securities.

[Kerry Smith, VP & Senior Mining Analyst]

Jamie, could you give me a rough idea what the sustaining and growth CapEx might be like at YD in 2021, once you get the lower mine infrastructure all tied in?

[James R. Porter, Chief Financial Officer]

So in 2021, Kerry, we'll be finishing up the TIA 1., so the tailings infrastructure that we're working on now that will support the existing remaining life at YD. So there should be a bit of growth capital related to that, maybe $10 million to $15 million. Apart from that, we'd be looking at our sustaining capital, call it, $45 million. So USD 60 million for the full year capital.

[Kerry Smith, VP & Senior Mining Analyst]

Okay. And then that money you're spending on the tailings would be the last amount to be spent for the current reserve, is that right?

[James R. Porter, Chief Financial Officer]

That would be the main part of it. We're -- ultimately, you do have to do raises every few years. Maybe every 3 or 4 years, you top it up a little bit, but it's a much smaller exercise. We're bringing on a new area right now, Kerry, the TIA 1, the -- we got the Schedule 2 amendment for.

[Kerry Smith, VP & Senior Mining Analyst]

Okay, got you. Okay. And then just on La Yaqui Grande, what would the build cycle be for that project? I know now you're going to come out with a decision here in Q2, I guess, but just how long would it take to build that project?

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

It would be in around a 2-year construction period. A lot of that is pre-stripping. There's a fair pre-strip on that one. So we -- it would be -- it would also have its own leach pad and associated infrastructure.

[Kerry Smith, VP & Senior Mining Analyst]

Okay. And then the spend, I guess, would be kind of evenly over that 2 years, I suppose?

[James R. Porter, Chief Financial Officer]

Yes, kind of from -- assuming we go forward, it would be kind of from mid this year on.

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

Yes, starting middle of this year, Kerry, we could probably spend as much as $35 million in capital. And then you'd be looking at a higher capital spend certainly in 2021, closer to $60 million to $70 million.

[Operator]

Thank you. 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 [phone], extension 5439.