Alamos Gold Inc

TSX:AGI

Earnings Call Transcript 2021-Q4

[Operator]

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

[James R. Porter, Chief Financial Officer]

Thank you, operator, and thanks to everyone for attending Alamos' fourth quarter and year-end 2021 Conference Call. In addition to myself, we have on the line today, John McCluskey, President and CEO; Peter MacPhail, Chief Operating Officer; and Scott R.G. Parsons, our Vice President of Exploration. To address any questions with respect to our reserve and resource update, we also have on the line today, Chris Bostwick, our Senior Vice President of Technical Services. We will be referring to a presentation during the conference call that is available to the webcast and on our website. I would also like to remind everyone that our presentation will be followed by a question-and-answer session. As we will be making forward-looking statements during the call, please refer to the cautionary notes included in the presentation, news release and MD&A as well as the risk factors set out in our annual information form. Technical information in this presentation has been reviewed and approved by Chris Bostwick, our Vice President of Technical Services and a qualified person. Also, please bear in mind that all of the dollar amounts mentioned in this conference call are in United States dollars unless otherwise noted. With that, I'll turn it over to John to provide you with an overview.

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

Thank you very much, Jamie, and good morning, everyone, and thank you for attending the call. Starting with Slide 3. We closed 2021 with strong performances at our Canadian operations. Young-Davidson had a record year achieving record mining rates and generating $100 million of free cash flow. Island Gold had another solid year operationally, generating $53 million of free cash flow, even with the ramp-up in spending on our Phase III expansion. This offset a challenging year at Mulatos with the operation working through a temporary period of lower production and higher costs until La Yaqui Grande comes on in the third quarter. With a stronger fourth quarter, we met revised full year guidance, producing 457,000 ounces of gold at a cash cost of $794 per ounce and all-in sustaining costs of $1,135 per ounce. Our production increased 7% from a year ago and combined with the higher gold price and strong operating margins, we generated record operating cash flow of $411 million for the year. We had a strong year from an exploration perspective as detailed in our reserve and resource update earlier this week, reserves increased at all 3 of our operations, driving a 4% increase in our global reserves to 10.3 million ounces. Grades also increased 5% as we continue to increase the quality of our overall reserve with higher grade additions at Island Gold and Mulatos. Island Gold continues to grow and achieve achieved the key milestone with high-grade reserves and resources increasing 8% to 5.1 million ounces net of depletion. Since we acquired Island, in 2017, reserves and resources have increased 3.2 million ounces net of depletion, including 1.4 million ounces since the publication of the Phase III expansion study in 2020, highlighting the significant ongoing growth and upside to this operation. This growth will be incorporated into an updated Phase III mine plan to be released midyear, and we expect that this will demonstrate a significantly more valuable operation. Now turning to Slide 4. As outlined in our inaugural 3-year guidance release in January, we expect stronger production at substantially lower costs in the years ahead. We are expecting similar production of approximately 460,000 ounces in 2022 with a temporary increase in all-in sustaining costs to approximately $1,215 per ounce. We expect La Yaqui Grande to drive lower costs in the second half of 2022. By 2024, La Yaqui Grande -- excuse me, just bear with me for a second. By 2024, La Yaqui Grande and higher grades at Island Gold are expected to drive a 4% increase in production and an 18% decrease in all-in sustaining costs to $1,000 per ounce. Combined with a 23% decline in capital spending at our operating mines in 2023 with development of La Yaqui Grande completed, we expect growing profitability from our operating mines over the next 3 years. Turning now to Slide 5. Looking beyond 2024, we expect a further increase in production and decrease in costs. Between the completion of the Phase III expansion at Island Gold and development of Lynn Lake, we have the capacity to increase our rate of production to approximately 750,000 ounces at substantially lower all-in sustaining costs of $800 per ounce by 2025. With our strong balance sheet and ongoing cash flow generation, we can fund all this growth internally, all the while providing solid ongoing returns to shareholders. Between our dividend and share buyback, we returned $51 million to shareholders in 2021. While we remain focused on our long-term growth objectives, we also expect to deliver on several key catalysts in 2022. Midyear, we expect to provide an updated mine plan for the Island Gold operation that will showcase a significantly more valuable operation that was outlined in the Phase III study. La Yaqui Grande remains on track to achieve commercial production and start driving our costs lower in the third quarter. Finally, we look forward to the Lynn Lake EIS approval and subsequent construction decisions in the second half of the year. 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 6. We sold 458,000 ounces of gold for record revenues of $824 million in 2021. As John noted, Young-Davidson had an excellent year, generating a record $100 million in mine site free cash flow. With the operation consistently operating at its expanded design capacity, we look forward to similar free cash flow generation over its 15-year reserve life and beyond. Fourth quarter revenues were $203 million from sales of 113,000 ounces at an average realized price of 1,798 per ounce. As previously guided, total cash cost of $843 per ounce and all-in sustaining costs of $1,237 per ounce, both increased from earlier in the year, reflecting the temporary increase in costs of Mulatos. For the full year, total cash costs and all-in sustaining costs were in line with revised guidance. Operating cash flow before changes in noncash working capital was $92 million or $0.23 per share in the fourth quarter. This was down 27% year-over-year, primarily reflecting lower gold price and lower gold sales. For the full year, operating cash flow before changes in noncash working capital was a record $411 million or $1.05 per share, a 7% increase from the prior record set in 2020. Our reported net earnings of $30 million in the fourth quarter or $0.08 per share included an unrealized foreign exchange loss of $3 million recorded within deferred taxes and foreign exchange and other losses of $4 million. Excluding these items, our adjusted net earnings were $37 million or $0.09 per share. Our full year adjusted net earnings were $162 million or $0.41 per share, representing a 3% increase relative to 2020. Capital spending totaled $92 million in the fourth quarter, including $32 million of sustaining capital, $51 million of growth capital and $8 million of capitalized exploration. For the full year, capital expenditures and advances of $358 million were at the lower end of our guidance. Free cash flow was negative $4 million in the fourth quarter and effectively flat for the year, reflecting higher capital spending given the construction of La Yaqui Grande and the Phase II expansion at Island Gold. We expect lower capital spending in the second half of this year with the completion of construction of La Yaqui Grande. Combined with lower costs, we expect stronger free cash flow starting in the third quarter of this year. In the fourth quarter, we also repurchased a net profit interest royalty for $16 million, which applied to the majority of the reserves and resources at Island Gold. Given the significant growth of the deposit over the last several years and ongoing growth potential, the repurchase of this royalty has significantly enhance the long-term value of the operation. We returned $51 million to shareholders in 2021, including $39 million through dividends and $12 million via share buybacks. These returns were up 63% from 2020 and represent a combined yield of 1.8% at our current share price. We expect similar returns in 2022 to be underpinned by our ongoing dividend, which amounts to an annual rate of $0.10 per share. We will continue to look for opportunities to be active on our share buyback. We remain debt-free and ended the year with $173 million in cash, $24 million of equity securities and $500 million of undrawn credit capacity. Strong ongoing cash flow generation, combined with our solid balance sheet, positions us well to provide an overview of our operations.

[Peter K. MacPhail, Chief Operating Officer]

Thank you, Jamie. Moving to Slide 7. Young-Davidson is performing to its potential and had a strong finish to the year, producing 51,900 ounces and generating near-record mine site in line with guidance, generating record mine-site free cash flow of $100 million. Mining rates averaged a record 8,240 tonnes per day in the fourth quarter and 7,900 tonnes per day for the year. The operation is demonstrating it can consistently operate at its design rate of 8,000 tonnes per day, and we expect this to continue. Low cash cost of $775 per ounce and mine site all-in sustaining costs of $1,017 per ounce in the fourth quarter continued to decrease through the year, reflecting higher grades and lower unit mining costs. On a full year basis, costs were in line with the revised guidance. As previously guided, we expect similar production in 2022 up to 185,000 and 200,000 ounces, with total cash costs and mine site all-in sustaining costs increasing 3% and 7%, respectively. The cost increase primarily reflects cost inflation, partially offset by operational improvements. We expect sustaining and growth capital spending to decrease 27% to approximately $60 million in 2022, but a big part of that decrease coming through the completion of construction of our new life and mine tailings facility in the fourth quarter of last year. We expect Young-Davidson to generate $100 million of free cash flow in 2022 and annually over the long term. Over to Slide 8. Island Gold had another solid quarter, producing 37,500 ounces at total cash costs of $575 per ounce and mine site on sustaining cost of $871 per ounce. Full year production of 141,000 ounces was in line with the initial guidance and total cash costs and all-in sustaining costs were in line with revised guidance. The operation generated $16 million of mine site free cash flow in the quarter and $53 million for the full year, net of a significant ongoing exploration spend and the ramp-up in spending on Phase III expansion. Looking forward to 2022, we expect Island Gold to produce 125,000 to 135,000 ounces, consistent with what we outlined in the Phase III study. As with Young-Davidson, we are expecting an increase in costs from 2021, primarily reflecting cost inflation and slightly lower planned grades. Work on the Phase III expansion is expected to continue to ramp up in 2022 with a corresponding increase in capital spending as outlined in the study. Permitting is expected to be completed in the first half of the year with construction activities focused on surface works and preparation for the [indiscernible] with the pre sync expected to start midyear. We're also working on an updated mine plan to be released midyear, which will incorporate the significant increase in reserves and resources since the Phase III study is completed. This updated mine plan will include an optimization of the mining sequence given the higher-grade additions in the Island Mulatos produced 23,100 ounces in the fourth quarter as the operation continued to be impacted by longer leach times for stockpile for staff and lower production from Cerro Pelon, which was depleted in the quarter. As a result, full year production of 121,300 ounces was lower than revised guidance. Costs were up sharply in the quarter, as previously guided, we were in line with revised guidance on a full year basis. A lot dose is expected to produce 130,000 to 145,000 ounces in 2022 with approximately 65% coming in the second half of the year at substantially lower costs with the start of low-cost production from La Yaqui Grande. We expect all-in sustaining cost to decrease 30% from the first half of the year to $1,175 per ounce in the second half, with continued improvement in 2023, reflecting a full year from La Yaqui Grande. Over to Slide 10. As you can see from these photos, La Yaqui Grande construction is progressing very well and remains on schedule. Capital spending was $26 million in the fourth quarter, bringing the full year spend to $102 million. All required major components are now on site, pre-stripping as the pit is well advanced. The heap leach facility is at 85% completion and the crushing circuit is more than 90% complete. We expect to begin commissioning the circuit and stacking more in the second quarter with the operation on track to achieve commercial production in the third quarter of this year. As we saw with La Yaqui Phase 1, this is a higher grade and significantly lower cost projects that will dramatically improve the production and cost profile of Mulatos starting in the second half of this year. I'll now turn the call over to Scott Parsons, our VP of Exploration, to discuss the reserve and resource update.

[Scott R. G. Parsons, Vice President of Exploration]

Thank you, Peter. On Slide 11, we had another excellent successful year with respect to exploration. Reserves were more than replaced at each of our 3 operations, driving a 4% increase in global reserves to 10.3 million ounces, net 582,000 ounces of depletion. The overall quality of this reserve also improved with grades increasing 5%, reflecting higher grade additions at Island Gold and Mulatos. The growth was driven by a 5% increase in reserves at Young-Davidson, extending its reserve life to 15 years, a 2% increase Island gold with grades increasing 4%, and a 14% increase in Mulatos with grades increasing 32%. The higher-grade additions in Mulatos reflect a new underground reserve at PDA, which is located adjacent to the May Mulatos pit. Global measured and indicated resources decreased to 4.5 million ounces from 6.9 million ounces, reflecting the conversion to mineral reserves at PDA and Young-Davidson and a reduction of non-pit constrained resources from the Mulatos main pit. Global inferred resources were relatively flat at 7 million ounces with grades increasing 6%, reflecting high-grade additions at Island Gold. On Slide 12, Island Gold continues to grow and achieved a key milestone with combined reserves and resources increasing 8% to 5.1 million ounces of high-grade gold. Reserves increased for the ninth consecutive year to 1.3 million ounces net of depletion, with grades also increasing 4% to over 10 grams per tonne. The additions were achieved through both the discovery and conversion of resources in the gap between the high-grade reserve and resources in the upper and middle portions of Island East. This new reserve block contains over 200,000 ounces, grading 12.6 grams per tonne. Given the proximity to the existing underground infrastructure, there is potential to bring this higher-grade ore into the mine plan in the next 3 years, providing further near-term production upside. Over to Slide 13. Our primary focus of Island Gold continues to be on expanding mineralization and defining new near-mine resources. And this is where we are having the most success. Inferred resources increased 8% to 3.5 million ounces with grades decreasing slightly to 13.6 grams per tonne. The majority of this increase came in the lower portion of Island East, where we added 424,000 ounces to a high-grade inferred block that now contains 2 million ounces grading 15.5 grams per tonne, all of this in proximity to the planned shafts. We also added a new inferred resource block totaling 39,000 ounces, 130 meters down plunge from this large high-grade inferred resource block. This also extended high-grade resources more than 270 meters to adapt to 1,750 meters. This high-grade block is part of the same E1 zone and remains open laterally and up and down plunge, which highlights the significant potential for further resource growth at Island Gold. On Slide 14, combined reserves and resources dialing have nearly tripled from the 1.8 million ounces at the time of acquisition to now total 5.1 million ounces. This includes a 1.4 million ounce or a 37% increase since the release of the Phase III expansion study, which will be incorporated into an updated mine plan to be released midyear. We expect this will demonstrate a further increase to the value of the operation. These are high margin, high grade ounces. We're adding in a very attractive discovery cost, which has averaged $11 per ounce over the last 3 years. Given our ongoing exploration success, we see excellent opportunities for this to continue with $40 million budgeted for exploration in 2022, more than half of which is allocated to Island Gold. And with that, I'll turn the call back over to John.

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

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

[Operator]

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

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

Maybe first question for Peter. Just on the new mine plan for Island that midyear. I'm assuming you're going to still have that 2,000-tonne a day mill in that 20 so you're just basically you'd be bringing forward some better grade that you're finding in the Island East. Is that correct?

[Peter K. MacPhail, Chief Operating Officer]

Yes. That would -- yes, we're looking at that, Kerry, we're also looking at does it make sense to bump it up slightly. So we're looking at all those things.

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

Okay. Okay. And just on Mulatos on PDA, what is the status of bringing that underground reserve into the mine plan then -- like would the timing on that be Peter?

[Peter K. MacPhail, Chief Operating Officer]

Yes, that's probably 3 years away. Some further study work to do on it and to get that going.

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

Okay. And you had pretty good mining costs at YD in the quarter, but you had pretty good mining rates as well. You're well over 8,200 tonnes a day. Is that CAD 42 a ton? Is that kind of the number you think you could do at 8,000 tonnes a day? Or what would the going forward number look like?

[Peter K. MacPhail, Chief Operating Officer]

Yes. I'm not sure. I think we probably provided guidance on that. It's -- I think if you go back 3 years, when we did that kind of learning on YD in person there. I think we were predicting at 8,000 tonnes a day to be in the low-40s. I think with some inflation or what not, that creeps up to like the mid-40s, but that's where I expect it to be.

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

Okay. Okay. That's helpful. And just remind me the CapEx for Lynn Lake from 27 feasibility, can you remind me what that number was?

[Peter K. MacPhail, Chief Operating Officer]

I don't have it in front of me.

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

Kerry, it was roughly $350 million.

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

$350 million. Okay. Okay. And will you update that number when you make a construction decision? Or how will you sort of look at that?

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

Of course, we've got to make sure...

[James R. Porter, Chief Financial Officer]

We put out an updated technical report on making a positive construction decision and we would certainly provide an updated capital cost estimate.

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

Okay, that's great. And I think just maybe one last question, if I could. The exploration budget is basically down $10 million from this year versus last year. And it seems like most of that, I guess, is probably in Island. But is that just a function of your ability to spend the dollars? Or is it like the budget might be a bit higher than this year?

[Scott R. G. Parsons, Vice President of Exploration]

Kerry, this is Scott. I can take that. The main difference from last year is at Island, we've ramped up the number of surface directional rigs we have because we've removed the underground directional drilling from the 2022 budget. So that's about a $10 million delta between the 2021 budget is the switching over to surface drilling from the underground directional drilling and continuing with underground conventional drilling as planned.

[Operator]

[Operator Instructions] There are no further questions registered. Thank you. The call has now ended. Please hang up your lines. Thank you for your participation.