Alamos Gold Inc

TSX:AGI

Earnings Call Transcript 2022-Q4

[Operator]

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

[Jamie Porter, Chief Financial Officer]

Thank you, operator, and thanks everyone for attending Alamos’ Fourth Quarter and Year-End 2022 Conference Call. In addition to myself, we have on the line today John McCluskey our President and CEO; Luc Guimond Chief Operating Officer; and Scott R.G. Parsons, Vice President of Exploration. To address any questions with respect to our reserve 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 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 Management’s Discussion and Analysis, as well as the risk factors set out in our annual information form.

Technical information in this presentation has been reviewed and approved by Chris Bostwick, our Senior Vice President of Technical Services and a qualified person. Also, please bear in mind that all the dollar amounts referred to in this conference call are in U.S. dollars unless otherwise noted.

Now, I will pass it on to John to provide you with an overview of the quarter.

[John McCluskey, President and Chief Executive Officer]

Thank you, Jamie and good morning everyone. Now starting with Slide 3. We had a strong finish to the year with record production of 134,000 ounces and costs coming in at the lower point of the year in the fourth quarter. All of our operations performed well, including a standout performance from Mulatos and the low cost La Yaqui Grande operation ramped up and operating at full capacity. La Yaqui Grande was a key contributor to our stronger consolidated free cash flow generation in the quarter of 18 million along with a steady ongoing performance from Young Davidson.

For the full-year, we produced 460,000 ounces of gold in-line with the midpoint of guidance, all three operations had a strong year meeting their respective production guidance. Total cash costs of $884 per ounce and all-in sustaining costs [of $1,204] [ph] per ounce, also met guidance and were both below the mid-point, a solid performance given industry-wide inflationary pressures.

As outlined in our reserves and resources, updated earlier this week, we continue to add value through exploration. Mining depletion was more than replaced with a 2% increase in our global reserves to 10.5 million ounces of gold along with a 3% increase in grades, driven by higher grade additions at Island Gold and Mulatos. This marked the fourth consecutive increase in our year-end reserves with grades also increasing over that time frame as we continue to improve the quality of the overall reserve base.

I'll look at Slide 4. Last month, we released our updated three-year production and operating guidance. Reflecting stronger outlooks at Island Gold and Mulatos, we increased our production guidance for 2023 and 2024. We expect production to increase 9% this year to approximately 500,000 ounces of gold and remain at similar levels in 2024 and 2025.

Our 2025 guidance excludes the higher grade PDA project, which as we outlined earlier this week, now contains a 70% larger reserve of 728,000 ounces. This represents potential production upside at Mulatos, which we expect to outline in the development plan for PDA to be completed in the second half of this year.

All in sustaining costs are expected to decrease 4% in 2023 and 17% by 2025 to approximately $1,000 per ounce, driven by low cost production growth for La Yaqui Grande and Island Gold. Our declining cost profile helps us stand-out in a sector that is battling industry-wide inflationary pressures.

A further increase in production improvements in cost is expected in 2026 following the completion of the Phase III plus expansion at Island Gold. This expansion will be a game changer for the operation and for the company and will grow our annual production to over 600,000 ounces of gold per year once the shaft is complete. Longer-term through the development of the Lynn Lake project, we have the potential to increase our annual production to approximately 800,000 ounces per year.

Now, looking at Slide 5, we demonstrated in the fourth quarter we can more than fund our growth internally while generating solid free cash flow. We are taking a disciplined and balanced approach to growth by focusing on Island Gold such that at current gold prices we expect to generate more than 100 million of free cash flow per year, while funding the Phase III plus expansion.

With that, I'll turn the call over to our CFO, Jamie Porter, who will review our financial performance.

[Jamie Porter, Chief Financial Officer]

Thank you, John. Moving on to Slide 6, we sold 133,164 ounces of gold in the fourth quarter at an average realized price of $1,741 per ounce, $15 per ounce above the London PM fix price for record revenues of 232 million. Total cash costs of $810 per ounce and all-in sustaining costs of $1,138 per ounce were below full-year guidance and the lowest level of the year, benefiting from higher grades at Island Gold and low cost production growth from La Yaqui Grande.

For the full-year, we sold 456,600 ounces of gold at a realized price of $1,799 per ounce for revenues of $821 million. Operating cash flow before change to non-cash working capital increased 14% from the third quarter and grew for the fourth consecutive quarter to 109 million or $0.28 per share. For the full-year, operating cash flow before change to non-cash working capital was 362 million or $0.92 per share.

Our reported net earnings of 41 million in the fourth quarter or $0.10 per share included unrealized foreign exchange gains of 12 million recorded within deferred taxes and foreign exchange, partially offset by other losses of 5 million. Excluding these items, our adjusted net earnings were 34 million or $0.09 per share. Our full-year adjusted net earnings were 108 million or $0.28 per share.

With the ramp up of construction activities on the Phase III plus expansion at Island, capital spending increased to 85 million in the fourth quarter. This included 27 million of sustaining capital, 50 million of growth capital and 8 million of capitalized exploration. For the full-year, capital expenditures of 314 million came in below the guidance range with some capital for the Phase III plus expansion deferred into the next few years.

Free cash flow increased to 18 million in the fourth quarter, up substantially from earlier in the year, driven by the ramp up of low cost production from La Yaqui Grande and a strong ongoing contribution from Young Davidson. This included 29 million of free cash flow in the quarter from Mulatos and another 24 million from Young Davidson. For the second consecutive year, Young Davidson has generated more than 100 million of free cash flow.

We remain debt free and ended the year with 130 million in cash, 19 million of equity securities, and 500 million of undrawn credit capacity. With higher production and lower costs expected over the next several years, we remain very well-positioned to continue generating solid free cash flow, while funding our high return growth projects and supporting ongoing returns to shareholders. This included returning 47 million in 2022 through dividends and share buybacks.

With that, I'll turn the call over to our COO, Luc Guimond, to provide an overview of our operations for the quarter and year.

[Luc Guimond, Chief Operating Officer]

Thank you, Jamie. Moving to Slide 7. Young Davidson produced 44,600 ounces in the fourth quarter and 192,000 ounces for the full-year, in-line with the midpoint of guidance. The operation generated another 24 million of mine site free cash flow in the quarter, bringing the full-year total to more than a 100 million for the second consecutive year.

Total cash costs of $942 per ounce and mine site all-in sustaining costs of $1,284 per ounce in the fourth quarter were up from earlier in the year, but both were in-line with guidance on a full-year basis. As previously guided, we expect similar production in 2023 of between 185,000 and 200,000 ounces with a similar rate of capital spending and slightly higher costs, reflecting industry-wide cost inflation. With a strong outlook and a 15-year reserve life, Young Davidson is well-positioned to generate a 100 million in free cash flow per year in 2023 and over the long-term.

Over to Slide 8, Island Gold had a strong finish to the year producing 40,500 ounces in the fourth quarter at a total cash cost of $605 per ounce and mine site all-in sustaining cost of $863 per ounce. This brought full-year production to 133,700 ounces near the top end of guidance. Full-year cost was slightly above guidance in large part reflecting the processing of lower grade stockpile ore at Young Davidson.

While very profitable, these ounces carried a higher cost structure contributing to the higher than guided costs. The operation used 15 million of cash in the quarter and 9 million for the full-year given the ramp up in capital spending on the Phase III plus expansion. Excluding 24 million of exploration spending during the year, Island Gold more than self-funded the expansion.

In 2023, we expect Island Gold to produce 120,000 to 135,000 ounces consistent with what was outlined in the Phase III plus study. As with Young Davidson, all-in sustaining costs are expected to increase slightly from 2022, reflecting industry-wide cost inflation.

Over to Slide 9. Work on the Phase III plus expansion continues to ramp up with significant progress made in the quarter. This included completing the shaft pre-sink down to its final depth of 42 meters in November. We also completed shaft site earthworks and critical path concrete foundations.

As you can see in the photo to the right, we are now in the process of erecting structural steel for the Hoist House and Hoist Drive Cooling Building. Our focus during the first half of 2023 will be on construction of the Hoist House and Headframe, with the sinking of the shaft expected to commence in the latter part of the year.

We are making solid progress on what is a lower risk expansion with the majority of the earthworks completed, the tailings facility already expanded, and far less unknowns with this being an operating mine. The expansion remains on track to be completed in 2026 after which Island Gold will be among the largest, lowest cost, and most profitable gold mines in Canada.

Moving to Slide 10. The Mulatos District produced 49,100 ounces in the fourth quarter, a 15% increase from the third quarter with all-in sustaining costs decreasing 19% to $922 per ounce. Collectively, the Mulatos District generated sharply higher cash – free cash flow of 29 million in the quarter with La Yaqui Grande being the driver.

Full-year production of 134,500 ounces was in-line with guidance, while costs were below guidance. Again, given strong performance from La Yaqui Grande in the second half of the year. With a full-year of low cost production from La Yaqui Grande in 2023, Mulatos District production is expected to increase 34% to between 175,000 and 185,000 ounces, a 21% lower mine site all-in sustaining costs.

Over to Slide 11, La Yaqui Grande produced 37,300 ounces in the fourth quarter, a 47% increase from the third quarter at 22% lower all-in sustaining costs of $545 per ounce. The operation is fully ramped up and performed extremely well during the second full quarter of operations with stacking rates increasing to average 11,100 tons per day for the full quarter, above the design rate of 10,000 tons per day.

Following the start of operations in June, La Yaqui Grande produced 67,600 ounces at industry low all-in sustaining cost of just under $600 per ounce. With a similar performance expected in 2023 and over a full-year, La Yaqui Grande is expected to be a key driver of strong ongoing free cash flow from the Mulatos district.

I will now turn the call over to Scott Parsons, our VP, Exploration to discuss the reserve and resource update.

[Scott Parsons, Vice President, Exploration]

Thank you, Luke. Over to Slide 12, we continue to have broad-based success with our exploration programs with reserves increasing 2% to 10.5 million ounces more than replacing 591,000 ounces of depletion. Grades also increased 3%, reflecting higher grade additions, Island Gold and Mulatos more than offsetting a slight decrease at Young Davidson.

Total reserves has now increased for four consecutive years, up 8% over that time frame. Grades have also increased 8% as we continue to add higher grade ounces and improve the quality of our reserve base. Global measured and indicated resources also increased by 14% to 3.9 million ounces at slightly higher grades reflecting additions at all of our operations and a new resource at our Golden Arrow project located near Young Davidson. Similarly, Inferred Resources increased 2% to 7.1 million ounces.

Over to Slide 13. Island Gold continues to grow with high grade reserves and resources increasing across all categories for a combined 4% increase to 5.3 million ounces net of depletion. This marks the seventh consecutive year the combined reserves and resources have grown with grades also increasing over that timeframe. Reserves increased 9% to 1.5 million ounces net of depletion, the tenth consecutive year of growth. Grades also increased 6% to 10.8 grams per ton.

Moving to Slide 14. The main driver of the increase in reserves and grades was a conversion of higher grade mineral resources in the middle portion of Island East. As shown in the long section, a further 204,000 ounces were added, doubling the reserves in this area to 410,400 ounces at similar higher grades averaging 12.5 grams per ton, 15% above the average reserve grade.

As can be seen in the very high grade inferred resource block below it, we also replaced the majority of resources converted to mineral reserves in the Island East area at substantially higher grades. This inferred block now contains 1.9 million ounces with grades increasing 10% from a year ago to average 17 grams per ton.

Several of the best holes that were drilled at Island Gold have come from this high grade [indiscernible] over the past few years contributing to the significant increase in resources and grades. These resources have been converting the reserves to greater than 90%. We just don't open laterally and down plunge. There's excellent potential for continued growth and higher grade reserves and resources.

Over to Slide 15. At Mulatos, growth of higher grade underground reserves at PDA more than offset depletion of lower grade open pit ore, driving a 9% increase in total Mulatos District reserves and a 19% increase in grades. Reserves to PDA increased by 70% to [728,000] [ph] ounces with grades also increasing 4% to 4.8 grams per ton.

Since declaring an initial reserve at PDA last year, combined reserves and resources have grown rapidly to now total 1 million ounces, a 71% increase from a year ago. With the deposit open in multiple directions and an expanded exploration program planned during the first half of 2023, we expect the PDA will continue to grow.

The higher grade ore from PDA is expected to be processed through the existing mill at Mulatos, which will be expanded to accommodate the significantly larger reserve. A development plan for PDA, incorporating the growth in reserves and resources is expected to be completed in the second half of this year.

Excluding PDA, remaining Mineral Reserve life of the Mulatos District is approximately 5 years. We expect the PDA will more than double this. Globally, we have a $47 million budget for exploration in 2023. With more than half allocated to following up on the significant ongoing potential of Mulatos and Island Gold, with the excellent potential to continue adding higher grade ounces to our reserve base.

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

[John McCluskey, President and Chief Executive Officer]

Thank you, Scott. I'll now ask the operator to open the line for your questions. Operator?

[Operator]

Thank you. [Operator Instructions] And the first question is from Mike Parkin from National Bank. Please go ahead.

[Mike Parkin, National Bank]

Hi guys. Congrats on the quarter. Nice results across the board. At La Yaqui Grande, this asset certainly seems to be performing extremely well. Can you just give us some sense on what 2023 guidance is assuming relative to where it’s kind of performing? On Slide 11, it's noted there that you're exceeding design capacity rates is the design rate of 10,000 tons per day, what guidance is based off of?

[Luc Guimond, Chief Operating Officer]

Yes, Mike. It's Luc here. Yes, look, we've had a bit of over performance certainly to start in 2022, but our long-term design rate is to average 10,000 tons per day at La Yaqui.

[Mike Parkin, National Bank]

Okay. Can you give any color on what's driving the performance?

[Luc Guimond, Chief Operating Officer]

Well, just early stages of the pit operation. So, we've just been a bit more productive, but as we continue to advance with the benches, we expect to be able to sustain a more reasonable 10,000 ton per day on average.

[Mike Parkin, National Bank]

Okay. Thanks. That's it from me.

[Operator]

Thank you. The next question is from Kerry Smith from Haywood Securities. Release. Please go ahead.

[Kerry Smith, Haywood Securities]

Thanks, operator. Good morning. Luc, you said Island the unit costs, the mining costs were I think [CAD 152] [ph] in Q4, which was higher than the average for the year and then that 2022 average was higher than 2021. Do you think we've, kind of seen the peak in the unit cost at Island here? Obviously, they will creep up as you go deeper in the mine, but are you kind of expecting like 2023, 2024 maybe we're going to be around 145, 150 a ton or should we be thinking about a higher number than that?

[Luc Guimond, Chief Operating Officer]

So, I think, I mean, we've obviously had some cost inflation pressures in the business, Kerry. And so, that's reflected a bit in that unit cost. I mean, it's also affected, I guess, the results for Q4 was – there was less tons mined overall in the quarter, which affected obviously the unit costs as well. But as we continue to go deeper and obviously once we bring on the shaft, the shaft infrastructure is going to be centralized.

So, from unit cost basis, we're going to be a lot more efficient than what we're doing currently with the ramp system falling out of the mine.

[Kerry Smith, Haywood Securities]

Okay. Yes. No, I was thinking more until the ramp comes in or until a shaft comes in, what we should think about for unit cost. Okay, that's helpful.

[Luc Guimond, Chief Operating Officer]

Yes, I would just add to that. I'd say similar to where we are currently, I wouldn't expect some significant increases. Like I said, some things will start to stabilize from an inflation point of view as far as some of our cost inputs for supplies.

[Kerry Smith, Haywood Securities]

Okay. Okay. And at YD, you've been mining below reserve grades for a while. I know the reserve grade came off a little bit with the higher gold price assumption this year, but when does that flip over and you actually start mining either reserve grade or slightly above reserve grades?

[Luc Guimond, Chief Operating Officer]

Well, as we continue to move to the mine plan, we will start to be above reserve grade. I mean, it's really sequence driven. Just sound geotechnical mining as far as the extraction of that ore body. So, as a result of that, the grades are what we see in front of us based on that sequence, but in the next couple of years, you'll start to see some higher grades above reserve grade.

[Kerry Smith, Haywood Securities]

Okay. Okay. And then I'm not – I know Chris is on the call. What was the dilution assumption that you assumed for the reserve calculation at PDA to get that 4.84 grams a ton? Like, how did they calculate the dilution?

[Chris Bostwick, Senior Vice President, Technical Services]

Yes, Kerry, we assumed 20% dilution, which is similar to what we experienced previously at San Carlos and 90% of mining extraction.

[Kerry Smith, Haywood Securities]

Okay. Okay. That's great. Thank you guys.

[Operator]

Thank you. [Operator Instructions] And the next question is from Harmen Puri from Bank of America. Please go ahead.

[Harmen Puri, Bank of America]

Hi, good morning. Thanks for taking my question. Just given that we have detailed through your guidance out with cost and CapEx and there is obviously free cash flow generation. Can you sort of just remind us about maybe the capital allocation priorities aside from just the expansion at Island? So, just maybe some color around capital returns and anything else that might be competing with your capital over that three-year period?

[Jamie Porter, Chief Financial Officer]

Yes. Thanks for the questions. Jamie here. I think over the next two years, I mean the focus certainly is on Island Phase III plus. We are in great shape as we indicated throughout the – the presentation this morning, we were pretty much self-funding that expansion with cash flow from operations from Island. And at current gold prices, we'll end the year with a cash balance of close to 200 million. So, I think our dividend is sustainable.

We'll be able to maintain, hold the dividend for the next couple of years. We'll look for opportunities to potentially be active on our NCIB. But yes, the focus over the near term is certainly on Phase III plus and longer-term on Lynn Lake. So, we'll be providing updates on that later this year.

[Harmen Puri, Bank of America]

And is there any color you can, sort of provide on maybe the M&A outlook? Is there any interest in maybe transacting or if you see an opportunity of that sort?

[Luc Guimond, Chief Operating Officer]

Like most companies, we're always looking at what's going on in the market, but at the moment, there's no – there's nothing imminent or actionable. We're looking – we look at M&A in a variety of ways. I mean, internal to our operations and proximal to our operations, we're always looking at opportunities there. As far as bigger transactions are concerned, if you look at our past performance, we tend to transact when the market is pretty much at its worst. And right now, I wouldn't characterize the market that way at all.

I think it's doing reasonably well. And we're certainly not getting any pressure from our investors with respect to M&A [with these] [ph] – they see we've got a pretty good growth profile in front of us with the gold expansion and the opportunity to build Lynn Lake after that. And of course, even the PDA is starting to come into view.

We don't obviously have anything on it quite yet, but with nearly 1 million ounces taking shape there, we're getting ready to gear up at Mulatos, adding a new source of mill production that can carry us well into the 2030s. So, I think our growth prospects right now just from our organic growth, but look pretty attractive and there's no pressure to do anything more.

[Harmen Puri, Bank of America]

That's great color. Thank you. That's it from me.

[Operator]

Thank you. There are no further questions registered at this time. This concludes this morning's call. If you have any questions that have not been answered, please feel free to contact Mr. Scott Parsons at 416-368-9932, extension 5439. Thank you for your assistance on the call today. You may now disconnect your lines.