Dundee Precious Metals Inc

TSX:DPM

Earnings Call Transcript 2018-Q1

[Operator]

Good morning. My name is James, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Dundee Precious Metals First Quarter 2018 Analyst Conference Call. [Operator Instructions]Thank you. I'd now like to introduce, Janet Reid.

[Janet Reid]

Good morning, everyone. I'm Janet, the Manager of Investor Relations, and welcome to Dundee Precious Metals First Quarter Conference Call. With me today are Rick Howes, President and CEO; and Hume Kyle, Chief Financial Officer, who will each comment on the quarter; as well as David Ray, Chief Operating Officer; Nikolay Hristov, Senior Vice President, Sustainable Business Development; and John Lindsay, Senior Vice President, Projects. They are here today to assist with answering questions following our formal remarks. After close of business yesterday, we released our first quarter results and hope you've had an opportunity to review our material.All forward-looking information provided during this call is subject to the forward-looking qualification, which is detailed in our news release and incorporated in full for the purposes of today's call. Certain financial measures referred to, during this call are not measures recognized under IFRS and are referred to as non-GAAP measures. These measures have no standardized meanings under IFRS and may not be comparable to similar measures presented by other companies. The definitions established and calculations performed by DPM are based on management's reasonable judgment and are consistently applied. These measures are intended to provide additional information and should not be considered in isolation or as a substitute for measures prepared in accordance with IFRS. Please refer to the non-GAAP financial measures section of our most recent MD&A for reconciliations of these non-GAAP measures. Please note that unless otherwise stated, operational and financial information communicated during this call have generally been rounded and any references to 2017 pertain to the comparable periods in 2018.On this morning's call, Rick will comment on our first quarter operating results as well as the progress being made on our capital projects and exploration programs for the quarter. Hume will then provide an overview of our first quarter financial results and our guidance for 2018.With that, I'll turn the call over to Rick Howes.

[Richard Allen Howes, President, CEO & Director]

Thanks, Janet, and hello, everyone, and thanks for joining us today for our first quarter 2018 conference call. I'm pleased to provide you with an update on our first quarter results and progress on our key projects and initiatives.As the global economy continues its gradual recovery, commodities should continue to benefit. The gold price has remained above USD 1,300 since December but ranged down between $1,300 and $1,350. Prospects for gold remains strong based on the macro trends of U.S. dollar weakening, slowing gold supply growth, strong demand growth trajectories in both India and China, and the largest consumer -- who are the largest consumers of gold.Despite the continued rise in interest rates as the Fed continues its policy of monetary tightening, gold still built momentum. And with soaring equity values and a low-interest rate environment, gold as a store of wealth, offers investors a good alternative and a hedge against potential rising inflation and geopolitical risk and uncertainty.Following the strong price performance in copper for 2017, copper declined more than 6% in the first 3 months of 2018. Surging warehouse inventories and weaker Chinese demand put pressure on prices. In the near term, prices may remain volatile to these factors as well as the near term supply disruptions. In the longer term, however, the copper market is expected to go into a deficit, with rising copper demand from general global growth, growing electric vehicle demand and a lack of recent investment in new supply. We expect copper to go into a deficit starting in 2019.Global gold and base metal equities are down 2% and 4%, respectively year-to-date, and the GDXJ is down 6%. Following our strong share price move up in 2017, our share price has continued its positive trend in 2018 improving 10%, since the beginning of the year and up 20% since the beginning of 2017 as we advanced our low-cost organic gold growth project at Krumovgrad to production.We continue to execute on our strategy to create value by optimizing operating performance. Advancing our organic growth projects and building a pipeline of future growth opportunities, while we maintain our balance sheet strength. With a strong first quarter performance from both Chelopech and Tsumeb operations, which we had record quarterly gold production at Chelopech of 57,331 ounces and copper production of 9.3 million pounds. Our all-in sustaining cost per ounce of gold was $696.At our Tsumeb smelter, we smelted 54,142 tonnes of complex concentrate, more than planned as a result of deferring the annual maintenance shutdown from Q1 into Q2. We're currently on track to achieve full year guidance in all performance measures.Overall, financial results were negatively impacted by the weaker U.S. dollar relative to the euro and to the South African rand. Earnings of $0.02 per share in Q1 was also not really reflective of the high first quarter metals production due to the timing of deliveries. This should correct itself from the coming quarters as deliveries catch up to production.Growth capital expenditures of $25 million, primarily related to the completion of the Krumovgrad Gold Project are on track with plan. 2018 sustaining capital expenditures are expected to be between $29 million and $39 million, with spending in Q1 of only $5 million, sustaining capital expenditures are expected to increase in the remaining quarters. We have increased our exploration investment this year to $14 million to increase our effort to add to our resource base around existing operations and projects. The increased budget will fund drilling programs at Chelopech, Krumovgrad, Timok in Serbia and Malartic Gold Project in Quebec.With Krumovgrad Project construction more than 59% complete, our balance sheet remains strong with $33 million in debt and total liquidity of $294 million, made up of $50 million in cash, $242 million in undrawn revolving credit facility as well as investments at fair value of $37 million.Smelter performance in Q1 continue to trend to more reliable and consistent operating performance. We smelted 54,000 tonnes of complex concentrate. This was higher than planned due to the annual maintenance shutdown being deferred from Q1 into Q2 as a result of the furnace integrity improvement initiative, which has extended the life of the furnace bricks. However, furnace refractory life has been -- historically, furnace refractory life has been around 9 months. This campaign will achieve 15 months and we believe further improvements are possible.Concentrate throughput in the quarter was hampered by power interruptions during an abnormally heavy rainy period in February and March and off-gas related problems, which we have since addressed. Start of maintenance shutdown is now scheduled to occur in May. Volumes concentrated are expected to improve significantly in the second half of the year. Throughput for 2018 is still expected to be within the guidance of 220,000, -- 250,000 tonnes, as we continue to optimize the performance and gain experience in operating this newly upgraded and interconnected facility. Q1 cash cost per tonne of concentrate process was $499. This was negatively affected by the 12% stronger rand relative to the U.S. dollar. Cost reduction efforts this year will help to reduce some of this impact. Reductions have been targeted in the areas of productivity, maintenance, contractors and outside services and utility.We continue to make progress reducing the secondary copper inventories that accumulated during the construction and commissioning of the acid plant and copper converters. This reduction will continue through 2018, and we expect to be back to normal levels in 2019. This will result in a reduction of stockpile interest and allow higher throughput capacity for new concentrates.We continue to advance the smelter expansion project to increase throughput of complex concentrate to as much as 370,000 tonnes per annum. Feasibility study was completed in the fourth quarter of 2016 and confirmed the robust project economics with an estimated implementation capital costs of approximately $52 million.Scope of the project includes the rotary holding furnace, additional cooling and other upgrades to the Ausmelt furnace as well as upgrades to the slag mill area. Work is progressing on securing the necessary permits to support this planned increase, and early discussions are underway to secure sufficient complex concentrate feed to fill this expanding capacity. A decision on this project is not expected to occur until 2019 at the earliest.Chelopech had a record quarter of gold production of 57,000 ounces following our record year, last year of 197,000 ounces. This was a result of higher gold grades of 4.5 grams in the quarter due to positive reconciliations from our 103 and 19 blocks as well as higher recoveries. We expect copper grades to remain about the same for the rest of the year. However, we expect gold grades to return closer to reserve average grades of around 3.2 grams for the remainder of the year. Higher gold grades and pyrite concentrate also contributed to the higher gold production.Cash cost per tonne of ore processed was $37 higher, which was 12% higher than Q1 2017, due primarily to this much stronger euro. A number of improvement projects are underway and should help offset some of the impact of the stronger euro. We have several projects to further increase mining intensity and lower mining costs, and we continue our process plant optimization work designed to produce energy, consumables and improve metal recoveries.Chelopech is on track to achieve production and cost guidance for the year. In our in-mine exploration program, we drilled 9,146 meters and continue to identify extensions to existing ore bodies and 1 new zone. We will be focused on reserve conversion of some of these recently discovered resources, particularly in the inactive upper levels of the old sublevel cave mining area.Early positive results were recorded for downward plunge extensions of Block 18, 19, 25 and 150 in the upper levels. In our active regional exploration program around Chelopech, we began a 20,000-meter drill program designed to systematically drill test the 1.6 kilometers pipe line target known as the Southeast Breccia Pipe Zone. 1,600 meters were completed in the first quarter, resulting in several good mineralized intersections. The best one being 25 meters at 4.5 grams gold equipment, with acid still pending on 4 more holes. 2 holes are completed on the Krasta Deep project following encouraging results from the first 2 drill holes in Q4, 2017, and drilling on the Krasta shallow target will begin in Q2. A number of other new targets have been identified for ground geophysics and geochemistry work, which will be tested in the near future.Our Krumovgrad construction project was approximately 59% complete at the end of March, and the project remains on track for first concentrate production in the fourth quarter of 2018. Approximately $96 million has been incurred to date with an additional $68 million to $72 million forecasted to complete in 2018. The aggregate cost of the project is expected to be between $164 million and $168 million compared to the original estimate of $178 million.A number of key milestones were achieved in Q1. The integrated mine waste facility, earthworks, was completed. The major mill mechanical installations began. The electrical instrumentation contract was mobilized to site and now began their work. And good progress was made on the key remaining construction permits, including the new access roads, main power line and discharge water pipeline. Pre-commissioning activities will begin in Q2, followed by noncommissioning and open pre-stripping and ore stockpiling in Q3. First concentrate is expected in Q4 and commercial production in Q1, 2019.The operating team is focused on operational readiness and deploying its shared service model to maximize the synergies with Chelopech.Exploration has identified a number of satellite deposits within a few kilometers of Krumovgrad. Drilling on the Surnak satellite began in Q1 to test the eastern and southern resource boundaries. 5 holes were completed with an additional 25 drill holes planned for the remainder of the year on this target. An additional 3 holes are also planned for the Kupel North satellite. Once this program is completed, a resource estimate technical report will be completed on these satellite deposits in the first half of 2019. The complete satellite will be drilled in 2019 followed by drilling on the remaining satellites. On our Chiirite license, approximately 20 kilometers northeast to Krumovgrad, we were following up on a near-surface, low-sulfidation gold vein system drilled by the state in the '80s.At our greenfield Timok Gold Project in Serbia, following this discovery of the Korkan West oxide deposit in 2017, we completed a major relogging program in the Korkan and Bigar Hill deposits to model the oxide and transitional zone boundaries. We'll also conduct a coarse ore bottle roll test and column leach test on the Korkan West, Korkan and Bigar Hill oxide and transitional zones. Bottle roll test indicate recoveries of 90% to 95% for Korkan and Bigar Hill oxide, 75% for Korkan West oxide and 50% to 55% for Korkan transition zone oxide.Column leach tests results are expected in Q2. We believe an initial phase oxide heap leach could have the potential to significantly improve the economics of this project. Additional drilling is planned for Bigar Hill gold repeated targets in the Korkan West oxide zone in Q2, and an updated resource estimate will be completed for all deposits in Q3 followed by an internal scoping study.At our Malartic joint venture and Pershimex -- with Pershimex in Quebec, an initial 19,042 meters of self-drilling program was completed. This program was designed to characterize the various targets that were defined within the volcano-sedimentary Blake River Group exploration from mapping and geophysical work completed in 2017. Sampling, logging and an updated geological modeling to refine the targets will be completed in Q2.For 2018, our focus will be on executing our organic growth projects, specifically the successful construction, completion in commissioning and ramp-up of the long anticipated high-grade low-cost Krumovgrad open-pit gold project in Bulgaria, which will generate significant growth in gold production and cash flow starting in 2019. The continued optimization of the Tsumeb smelter performance, so that we continue to generate growing free cash flow from this business. And #3, continue pursuing our growth opportunity with our existing portfolio of assets and through a disciplined approach to acquisition opportunities.Thank you. I will now turn the call over to Hume, who will review the financial results and 2018 guidance, following which, we will open the floor to questions.

[Hume D. Kyle, Executive VP & CFO]

Thanks, Rick. For the first quarter we reported adjusted net earnings of essentially 0 per share compared to an adjusted loss of $0.04 per share for the first quarter of 2017, and adjusted EBITDA of $20 million compared to $14 million in 2017. These increases were primarily driven by higher volumes of the throughput due to the timing of the annual maintenance, and reduced deductions for metals exposure at Tsumeb, higher realized metal prices, partially offset by a U.S. weaker dollar and lower volumes of payable metals sold due to the timing of deliveries at Chelopech, which masked what was otherwise a strong production quarter for Chelopech and was the key factor that resulted in our Q1 financial results being weaker than what you would have expected, given the underlying strong performance.From a cash flow perspective, funds from operations during the quarter were $18 million, up slightly from $17 million in 2017, and free cash flow defined as funds from operations less sustaining capital and debt service obligations was $11 million, essentially unchanged from 2017.As Rick has already commented on our Q1 costs, I will simply add that the increase with respect to our per tonne costs at Chelopech was entirely due to currency, which more than offset the per unit lower operating costs that we achieved during the quarter. With respect to our all-in sustaining costs, the favorable impact of a higher gold grade and concentrate sold more than offset the FX impacts during the quarter as well. And at Tsumeb, our cash costs of $499 which was down $53 per tonne relative to prior year, was essentially entirely attributable to the volume impact associated with a full run in Q1 versus annual maintenance in Q1 of 2017, last year.From a capital expenditure standpoint, sustaining growth capital expenditures for the quarter were $5 million and $25 million, respectively for an aggregate spend of $30 million, up $22 million in the corresponding period of 2007 (sic) [ 2017 ], and a little lower than what we've actually planned. This increase was related primarily to increased construction activities at Krumovgrad where we incurred approximately $18 million during the quarter or approximately $96 million since commencement of construction, with approximately $70 million to go.Based on installed quantities, we're approximately 50% complete, pretty much in line with schedule, and we're tracking to come in under budget and to deliver first concentrate in the fourth quarter of 2018.During the quarter, no additional hedging was undertaken beyond the regular QP hedging that we do. And as a result, for the balance of the year, 52% of our expected payable copper byproduct production was hedged at $2.62, or is hedged at $2.62, which was part of our de-risking strategy to support moving forward with Krumovgrad, and 36% has been hedged using options which provide a forward of $2.80 in the ceiling of $3.32. From a currency standpoint, we've hedged approximately 33% of the Namibian dollar at NAD 13.68 and effectively all of our projected euro capital expenditures in respect to Krumovgrad at 1.15 for the balance of the year, which essentially supports our objective of staying within the capital budget.Coming into the second quarter of 2018, we remain in very good financial shape. We saw $257 million of aggregate liquidity comprised of the undrawn $242 million revolving credit facility and $15 million of cash and with increase in forecast cash flow generation, we're well positioned to complete the Krumovgrad Gold Project and advance the other growth initiatives that were referred too.Looking over for the balance of the year, we're confident that both Chelopech and Tsumeb will achieve the expected levels of performance. With Chelopech just metal production being lower and its sales being higher than what was reported in Q1. And Tsumeb throughput on average, after taking into account, the annual maintenance shuts scheduled for mid-May being higher over the balance of the year.As a result, our 2018 production cost guidance has remained unchanged from what we issued in February. Notably, gold production is expected to be between 165,000 and 195,000 ounces and that excludes 3,000 ounces that we expect to produce out of Krumovgrad prior to declaring commercial production. Copper production is expected to be between GBP 34 million and GBP 40 million. Tsumeb production is expected to be between 220,000 and 250,000 tonnes. Our all-in sustaining cost per gold is expected to be between $640 and $855 and the cash cost for Tsumeb is expected to range between $440 and $500.On the capital front, sustaining capital expenditures for 2018, as Rick noted, are expected to be between $29 million and $39 million, up from the average over -- up from -- up on average over our Q1 levels, and up from prior year -- years due to raising the elevation of Chelopech and Tsumeb management facility and a few projects that were shifted from '17 to '18.Growth capital expenditures in '18 are expected to be in the $92 (sic) [ $94 ] million to $100 million range consistent with what we said earlier. $88 million of which relates to Krumovgrad and the balance relates to resource developments, drilling and the new smart center at Chelopech and the upgrade of the slag mill concentrate plant at Tsumeb.Our exploration spending on a range is $10 million to $15 million with the majority being directed towards Chelopech, Krumovgrad and our advanced exploration projects called Timok Gold in Serbia, with the balance focused on greenfield projects in Bulgaria, Serbia and our Malartic project in Quebec.Corporate G&A, excluding the mark-to-market impact associated with the share-based compensation, which resulted in higher G&A in Q1 due to the continued appreciation of our share price is expected to track current levels and fall within our annual guidance of $20 million to $24 million. And as Rick mentioned, we're very focused on delivering Krumovgrad on time and under budget, preparing for startup and advancing a number of initiatives, all of which are expected to increase profitability and grow our business.Finally, our investment in MineRP is performing as expected, and made very good progress executing the business plan in Q1. Interest in its industry changing tools is high, and while we do not expect MineRP to have a material impact on our financial results for 2018, we remain confident in its future growth potential and its ability to add value as a portfolio investment and as a component of our overall digital strategy.In closing, while the timing of the delivery that Chelopech dampened Q1's financial results, this is expected to correct itself and translate into better financial results over the balance of the year. And as a result, we anticipate exiting 2018 with a strong balance sheet. And as Rick already noted, with Krumovgrad construction being complete, we expect to see a substantial increase in reported production and free cash flow generation commencing in 2019.And with that, I will turn the call back over to the operator.

[Operator]

[Operator Instructions] Your first question comes from the line of Trevor Turnbull from Scotia back.

[Trevor Turnbull, Analyst]

Just wanted to ask a little bit about the costs at Tsumeb. In the MD&A you mentioned, there was labor cost, electricity cost and then obviously the South African rand, which is tied to the local currency. I also -- I thought you guys were able to take out some of the contractor cost at Tsumeb. And so I was kind of wondering if you could talk a little bit about where you see labor costs going forward. I think, Rick, might have mentioned something about electricity, which sounded like it may have been a temporary issue. But if you could mention that as well? And then, given that your hedging up to 1/3 of your Botswanan currency exposure through the rand, do you see that as continuing to be a pressure on the cost going forward?

[David Rae, Executive VP & COO]

All right. So this is David Rae. Let's start with contractors. So one of the things that we've done in the course of the last few months is we've in-sourced our maintenance activity, and we've also in-sourced the oxygen plant activity. And in combination, that's potentially a 5% overall operating cost per year saving directly with that activity. So what we're doing is that as we've finished the other activity now in terms of continuity, we're looking towards those areas where we can work with external third parties where we're paying additional money for those service provisions. And we believe we're in better position now to take that all and get efficiency. So I don't know if that answers your question. Those are the primary targets on contractors. In terms of electricity, the electricity rates in the midyear have been increasing at a rate of between 10% and 17% per year. And that's primarily a concern for us. There's lots of opportunity in terms of optimization of our energy use because maximum demand consumption is a large part of that cost. So what we're doing is, we're looking for continuity on energy. That's better operation of the plant, so we make better use of the power that we're actually paying for. There's some optimization in terms of the power utilization. And then other than that, we're also considering alternative supply of energy, with the potential of constraining that inflationary cost. I don't know if that helps with the electricity. And in terms of the...

[Trevor Turnbull, Analyst]

Just -- yes -- sorry, David, just on the electricity, what proportion of the cost is electricity right now?

[David Rae, Executive VP & COO]

It's at mid-20%.

[Trevor Turnbull, Analyst]

And it's tied to the local currency, I would assume.

[David Rae, Executive VP & COO]

It is.

[Trevor Turnbull, Analyst]

I'm sorry. And then on the currency, did you -- do you feel that, that 1/3 is sufficient? For example, the level of currency hedging that you're talking about at this time, was that in place for Q1 as well?

[Hume D. Kyle, Executive VP & CFO]

Yes. So we did hedge little over 30% of the ZAR, the Namibian dollar, which is length of the ZAR heading into 2018. And we consciously stopped hedging anything further following the abrupt move in the currencies very late in the year. We continue to monitor it. As you probably know, it's -- like last year, it probably averaged ZAR 13.5. And then with the election in South Africa, there was a very strong rally that caused it to probably go down to about ZAR 11.5, and it's currently trading around I think ZAR 12.50 to ZAR 12.70. So we're monitoring that. I would anticipate that we would opportunistically try to put on some additional hedging and increase that position. From an overall standpoint, we can certainly tolerate the volatility in the currency. From a Tsumeb perspective, it is significant and key objective for us as we continue to manage Tsumeb to a free cash flow situation.

[Trevor Turnbull, Analyst]

And -- sorry, and then what proportion of the cost than are tied to the currency? I would assume virtually all of it.

[Hume D. Kyle, Executive VP & CFO]

Virtually all of it, yes.

[Trevor Turnbull, Analyst]

Okay. And then just one last question while I've got you, Hume. You mentioned MineRP, and also there was a comment that suggested that it's going through a bit of a growth in ramp-up period, which was why it had some higher G&A costs. Is that something that you expect to continue? Or will those costs start to come down now that you're through that at least initial spend?

[Hume D. Kyle, Executive VP & CFO]

Well, I think it's probably more like the opposite. They've had to increase their G&A to support the growth trajectory that they're on. So what's lagging is the signing of contracts. And we're seeing very good momentum in that regard, and we expect additional contracts to be signed over the balance of the year and into 2019. So no, that G&A increase was fully contemplated, expected to stay and probably increase further based on getting traction on signing additional contracts.

[Trevor Turnbull, Analyst]

So we should rather than -- yes, so we should be looking for the revenue to start to catch up?

[Hume D. Kyle, Executive VP & CFO]

Yes, yes. And you'll recall that when we did the deal, we made the investments. We provided $5 million line. They drew $3 million. We don't expect at all to put any more than $2 million, if any more at all in over the balance of the year. It's all just going to be predicated on the timing of closing certain sales.

[Operator]

[Operator Instructions] Your next question comes from the line of Don MacLean from Paradigm Capital.

[Don MacLean, Senior Analyst of Gold]

So a quick question on the rebricking. I think you've been talking about the extending it to sort of 14, 16 months. Does that look like that's a sustainable schedule?

[Richard Allen Howes, President, CEO & Director]

Yes, Don, actually it looks like -- actually very cautious. So we've already done 14 months now. And the remaining brick life is doubled what it was at the end of the last campaign. So we're very confident at the ability to move towards 18 months. The main thing now is understanding what we have to do with the rest of the plant, to have that able to utilize that full time line.

[Don MacLean, Senior Analyst of Gold]

Including the roof? Just kidding.

[Richard Allen Howes, President, CEO & Director]

The roof at this point is we got that solid 3-day replacement once every 6 months. It's not really material, and we're still looking at the design of that. So that will in the meantime be a constraint, but it's not material overall.

[Operator]

There are no further questions at this time. I'll turn the call back over to Rick Howes for closing remarks.

[Richard Allen Howes, President, CEO & Director]

Okay, thank you very much for joining us on the call today. And I wish everyone a good week and happy Mother's Day.

[Operator]

This concludes today's conference. You may now disconnect.