Dundee Precious Metals Inc

TSX:DPM

Earnings Call Transcript 2020-Q1

[Operator]

Good morning, ladies and gentlemen, and welcome to the Dundee Precious Metals' first quarter's results conference call. [Operator Instructions] As a reminder, this call may be recorded. Thank you.I would now like to turn the conference over to your host, Ms. Jennifer Cameron. Ma'am, please go ahead.

[Jennifer Cameron, Director of Investor Relations]

Thank you and good morning. I'm Jennifer Cameron, Director, Investor Relations, for Dundee Precious Metals and I'd like to welcome you to our first quarter conference call. With me today are David Rae, our incoming President and CEO; and Hume Kyle, Chief Financial Officer.After the close of business yesterday, we released our first quarter results and hope you've had an opportunity to review the 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 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 meaning 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 2019 pertain to the comparable period in 2019.I'll now turn the call over to David Rae.

[David Rae, President, CEO, Executive VP, COO & Director]

Good morning, and thank you all for joining us. It's a pleasure to be here today as the incoming CEO of Dundee Precious Metals and provide you with an overview of our first quarter results and some insights into our achievements over this period.I'd first like to acknowledge Rick's many contributions to the company over the past 11 years as he leaves DPM in the strongest position it's ever been in. Rick will be joining us at our virtual AGM later today and I hope you'll join us all at DPM in wishing him the best in his future endeavors.In terms of COVID-19, it goes without saying that this has been a very challenging few months around the world as a result of the pandemic. We continue to manage the situation by prioritizing the health and safety of our workforce and local communities and to focus on maintaining the continuity of our operations. Thus far our operations are continuing to operate in line with our guidance for the year and we've not experienced any disruptions to our inbound and outbound supplies.The pandemic has, however, had an effect on the local communities where we operate and we're making a number of efforts to provide financial supports and assistance with a particular focus on the most vulnerable groups within our employees and the communities. To date we've donated over $750,000 to support numerous initiatives to benefit the local communities where we operate. This financial support has been focused on local hospitals to support their activities and to assist them in preparing additional medical facilities to isolate and treat COVID-19 patients. We've also provided necessary medical supplies and protective equipment. We continue to take proactive measures to closely monitor the situation and given our financial and operating strength, we're well positioned to manage these challenges.As you've seen from our news release circulated last night, we delivered on an exceptional first quarter, achieving multiple records for operating and financial performance. This was accomplished despite the recent challenges with the COVID-19 pandemic and that's a tribute to our strong local operating teams, the relationships we've built with our stakeholders which resulted in production of 73,000 ounces of gold, 9.4 million pounds of copper and near-record smelter performance. We also had a better than expected cost performance, resulted in an all-in cost for the quarter of $593 per ounce and we had strong financial results including record adjusted EBITDA, record adjusted earnings per share, and a record $49 million of free cash flow for the quarter.Turning to our operating performance, Ada Tepe and the highlights from our operations starting with Ada Tepe last year. The full ramp up of our newest mine was achieved within only 3 months, a remarkable accomplishment in our industry. Ada Tepe continues to deliver impressive performance and in only its second full quarter of operation, the mine produced 30 ounces of gold. This was, I must admit, above our expectations for the quarter as a result of strong throughput and grades. With cash cost of $40 per tonne of ore processed, cost performance was also significantly better than anticipated and Hume is going to go into some of the reasons behind that shortly.The mine and mill continue to perform at expected levels and meet or exceed our expectations. With a strong start to the year, Ada Tepe continues to be on track to meet its 2020 guidance with gold production expected to increase significantly over the 2019 levels as our newest mine contributes in its first full year of production and the associated cash flow generation to our portfolio.We're also continuing with our exploration efforts around Ada Tepe and we had 5,200 meters of drilling planned at Surnak and other satellite prospects during the course of the year with the goal of establishing a new mineral resource to expand operations at Ada Tepe.At Chelopech, continue -- there was a continuation of the excellent track record of consistent performance producing approximately 43,000 ounces of gold and 9.4 million pounds of copper. Gold production was in line with our expectations while copper production was slightly below. That was as a consequence of slightly lower than expected copper grades and recoveries. Cash cost of $36 per tonne of ore processed were in line with expectations.So, overall, Chelopech is on track to meet its 2020 guidance and continues to perform well. At the end of March, we filed the technical report with an updated mineral reserve and mineral resource estimate for Chelopech. We added 1 million tonnes of mineral reserves, largely as a result of new site designs and redesign of existing stubs. This partially offset production depletion of 2.2 million tonnes for a net reduction of 1.2 million tonnes in total. With a proven and probable gold reserve of 1.6 million ounces and 336 million pounds of copper, that supports an 8-year mine life and with an additional 1.3 million ounces of gold and 296 million pounds of copper in MMI, there is a strong potential to continue extending mine life at Chelopech as we have achieved over the last 11 years of our production there.In terms of exploration, we continue to focus on extending the mine life through our in-mine and brownfields exploration programs. In our first quarter, a total of approximately 13,000 meters of resource development diamond drilling was completed with the aim of expanding the current ore body extents and to explore for new mineralization along models trends.In terms of brownfield activities, diamond drilling from surface continued around Chelopech through the first quarter of 2020 at the Wedge South target and at the Krasta prospect with a total of 4,000 meters of drilling completed in 11 holes.Moving to Tsumeb. Tsumeb achieved its second highest quarterly production on record, which was a significant increase from the previous quarter as the operation ramped up following an extended maintenance shutdown completed during the fourth quarter of 2019. This is particularly satisfying as historically the first quarter has been the most challenging due to power instability during the rainy season. This shows the outcome of efforts by the team to mitigate these realities.The cash cost per tonne of complex concentrate smelter during the first quarter was $357. This was below expectations and Hume, again, will discuss this shortly.As we previously announced in early April, we temporarily reduced operations at Tsumeb in April by shutting down ancillary plants in response to a government directive targeted at limiting staff levels in response to COVID-19. The smelter has now returned to full operations and despite a 30-day reduction, Tsumeb remains on track to deliver its 2020 guidance.Overall, as you can see from our exceptional first quarter results, 2020 is on track to be another milestone year for DPM as we're now starting to demonstrate the full potential of our portfolio. In terms of future growth, our Timok project in Serbia is advancing well as a potential growth opportunity following encouraging results from the optimization work completed last year. To incorporate the sulphide portion of the resource, we've recently initiated a pre-feasibility study which is expected to be completed by the end of 2020. We also continue to evaluate additional opportunities to support growth and that have the potential to generate strong returns and enhance the value of the company.In closing, DPM has never been in a stronger position and with our strong first quarter result, we've demonstrated that significant free cash flow generation is underway and that we are committed to deploying this capital in a disciplined manner. Earlier this year we were very pleased to announce an inaugural dividend of $0.02 per share, a quarterly level we believe to be sustainable based on our free cash flow outlook. And yesterday we announced the second quarter dividend payable on July the 15th. This is a signal of our commitment to delivering superior returns to shareholders and a disciplined approach to capital allocation as well as confidence that we will continue to deliver strong results in the coming years.Before I wrap up, I'd like to acknowledge all of our dedicated employees across the company for their outstanding efforts to proactively respond to the challenges of the COVID-19 pandemic while also maintaining the continuity of our operations. With continued volatility and global markets, we expect the strong fundamentals for gold to continue. DPM is now extremely well positioned relative to our peers to benefit in this environment of high gold prices and can also better withstand any fluctuations that may occur. We firmly believe that DPM's strong fundamentals continue to represent a compelling value opportunity for investors.And with that, I'll now turn the call over to Hume for a review of our financial results and comment on our 3-year outlook and 2020 guidance, following which we will open the call to questions.

[Hume D. Kyle, Executive VP & CFO]

Thanks, Dave. Good morning, everybody. As Dave said, the global challenges being posed by COVID-19, despite those challenges, we had an exceptional Q1 with strong production and cost performance contributing to a number of quarterly records including net earnings, adjusted EPS, adjusted EBITDA and free cash flow. Relative to 2019, 2020 financial results benefited from higher volumes of gold and copper sold, which primarily reflected the start-up of Ada Tepe and an additional delivery by Chelopech, higher gold prices, lower TCs, a stronger U.S. dollar and lower share based compensation cost related to period-over-period share price performance.As a result, we reported some impressive improvements in financial performance compared to 2019 with adjusted net earnings of $46 million or $0.26 per share, representing a 27% increase compared to 2019. An EBITDA of $78 million, up $61 million or 450% compared to 2019.From a cash flow perspective, Q1 cash flow from operating activities was $9 million compared to $14 million in 2019, primarily reflecting an increase in working capital of approximately $48 million, most of which is temporary due principally to the timing of sales and receipts from our customers.Funds from operations on the other hand, which are more reflective of cash generated during the quarter as it is not impacted by swings in working capital, was $57 million compared to $16 million in the prior period. During the quarter we also generated free cash flow of $49 million, a significant increase over $10 million generated in the same period last year, reflecting Ada Tepe's contribution to the cash flow generating capability of our portfolio and our overall strong operating performance.This was partially offset by the delivery of 13,000 ounces of gold in respect of our prepaid forward gold sales arrangement which resulted in approximately $18 million or $1,365 per ounce of deferred revenue being recognized in earnings with no corresponding contribution to cash flow.Turning to our consolidated cash cost measures, our all-in sustaining cost per ounce for Q1 was $593. This was down $226 from 2019 due primarily to low cost gold production from Ada Tepe and higher copper byproduct volumes. At Tsumeb, our Q1 cash cost was $537 (sic) [ $357 ], down $13 from 2019 due primarily to higher volumes, a weaker ZAR which was partially offset by lower acid prices.From a capital expenditure standpoint, sustaining capital expenditures for the first quarter were $7 million, up $5 million from 2019 and reflecting investments that are being made to extend the life of Chelopech's tailings management facility as well as the start-up of Ada Tepe, while growth capital expenditures for the first quarter were $3 million, down $15 million from 2019, due to the completion of the Ada Tepe mine in June 2019.As Dave said, we continue to maintain a strong financial position. As of March 31, we had $189 million of cash resources, $175 million under our revolving credit facility, a cash position of $14 million, and a portfolio of investments that provide additional upside, comprised primarily of a 10% interest in Sabina, a 19% interest in INV and a 78% interest in MineRP.As part of our ongoing assessment of the potential impacts of COVID-19 on our business, we evaluated the adequacy of our financial resources and I can confirm that we're satisfied that we are well positioned to deal with any of its potential impacts.From a risk management perspective, we also continue to monitor our underlying financial exposures and as reported in previous periods, we've entered into a series of hedges in the form of zero cost collars to reduce Tsumeb's operating cost exposure to foreign currency movements. For the balance of 2020, approximately 77% of Tsumeb's projected operating costs have been hedged with a weighted average floor and ceiling exchange rate of 14.61 and 16.14. And for 2021, 55% of its operating cost has been hedged with a weighted average floor and ceiling exchange rate of 15.67 and 18.31.Looking forward, we continue to focus on increasing the profitability and the net asset value of our business by optimizing our existing assets. Based on year-to-date performance and our outlook over the balance of the year, DPM is on track to meet its previously issued guidance for each of its operations including expected gold production of 257,000 to 299,000 ounces of gold and 35 million to 40 million pounds of copper, an all-in sustaining cost of $700 to $780 per ounce and a cash cost per tonne of complex concentrate smelted of $370 to $450.Over the balance of 2020, just under 21,000 ounces of gold will be used to fully settle the company's prepaid forward gold sale which was undertaken to provide partial funding for the construction of our Ada Tepe mine. If foreign exchange rates and copper prices remain unchanged from current spot levels over the balance of the year, 2020 cash costs are expected to be closer to the low end of our guidance.Our longer term outlook that we issued in February and which covers 2020 to 2022 remains unchanged and the details of which can be found in the 3-year outlook section of our MD&A.In closing, with significant free cash flow generation underway, we remain committed to maintaining the disciplined approach to capital allocation and are in great position to grow our cash position to support prudently investing in higher return growth opportunities and to return a portion of the free cash flow generation to our shareholders by way of a dividend, the second of which was announced yesterday. With this context, we firmly believe, notwithstanding the strong share price appreciation we've seen in recent years, DPM continues to represent an attractive investment opportunity for gold investors.And with that, I'll turn the call back over to the operator.

[Operator]

[Operator Instructions] Your first question comes from the line of Mark Mihaljevic from RBC.

[Mark Mihaljevic, Analyst]

Again congrats, David, on your first formal day in the seat or effectively the first day in the seat. And congrats to Rick, I'm assuming he is listening in. And again, excellent quarter from you guys. So can you guys -- can you just give some more color around this working capital field and when you would expect to recover it? Just a little more clarity on that.

[David Rae, President, CEO, Executive VP, COO & Director]

Hume, did you want to take that?

[Hume D. Kyle, Executive VP & CFO]

Yes, sure, no problem. Yes, I mean I would say that the working capital is just completely normal course. It has nothing to do with any credit issues. It has nothing to do with COVID-19. It's really just the timing of when we deliver and then the corresponding timing of when we get paid. And that said, and it's -- if you look at it quarter-over-quarter or as we look at it quarter-over-quarter over the balance of the year, the vast majority of it is going to get reversed in the second quarter. And I would say that like on a go-forward basis, there will be a small portion that might stay simply because we're in an environment where we've got higher gold prices. So on a balance, our outstanding receivables at any given point in time will be a little bit higher reflecting that. But the vast majority of the $48 million change in working capital, $40 million of it was receivables and as I say, the vast majority of it will reverse in Q2.

[Mark Mihaljevic, Analyst]

Just it's always good to clarify and understand if there is any structural build of higher inventories or again preparing for COVID or any risk around COVID or delays with shipments or whatever. So, again, good to clarify that. And then can you give some more clarity on the cost performance at Ada Tepe? I mean the $40 a tonne is quite a bit below what you guys were guiding. So kind of what drove that delta and should we expect some of that to reverse in the back half of the year?

[David Rae, President, CEO, Executive VP, COO & Director]

Go ahead Hume and I will add in if there is other comments to get -- give the picture.

[Hume D. Kyle, Executive VP & CFO]

Yes. No, I think -- yes, happy to do that. No, Ada Tepe definitely performed better than even we had expected. I think it's due to production, it's due to grade, it's due to the strong U.S. dollars that we saw as well as timing. So we don't expect that we'd be at the same level that we were in, in Q1 throughout the entire year just because timing of maintenance activities and other activities that take place at the mine throughout the year. So I wouldn't sort of forecast that this is a level that we would likely come out at the end of the year and that's why we haven't changed our guidance. But that said, I think at this stage there is good reason to believe that we are going to perform at the lower end or certainly below the midpoint of our guidance particularly if foreign exchange rates remain at present levels. Dave, do you want to add anything?

[David Rae, President, CEO, Executive VP, COO & Director]

Sure. I mean to give you an idea, we had normal maintenance activities in Q1. We've had normal maintenance activities in both our mines in Q2. So just a couple of days of downtime for realigning activity. So part of the performance was also related to the tonnage. So we had a little excess in terms of what we did in Ada Tepe gross as planned and then of course there was a similar sort of value in grade. So those 2 things affected the overall performance when it came to production. But in terms of cost, you of course get some benefit with your variable cost versus fixed cost. There were a couple of other minor things. So as a consequence of the COVID situation, the power cost in country was slightly reduced, so that was about a $1 per tonne. And then we also had some contracting which we put in place, which was slightly better than anticipated. So there are some reasons why, as Hume says, we're sort of middle trending down in terms of what we had guided on for the year. But with an exceptional performance in Q1, we will do everything that we can to make sure we keep the cost as low as possible. But that's a little that than we would anticipate for the rest of the year. So as Hume said, we're maintaining our guidance at this point.

[Mark Mihaljevic, Analyst]

And then, Dave, I guess kind of obviously early days for you in the CEO role, but you kind of had a bit of time to prepare it. So kind of how are you thinking about the strategic approach for DPM and do you think there will be any changes relative to what we've previously seen?

[David Rae, President, CEO, Executive VP, COO & Director]

So at a high level, if you look historically, we've worked on making sure that we have high continuity of operations and exceptional people well trained to do what they do. And that the idea being during the build of Ada Tepe, but we are able to generate the cash flow that supports our ambitions to have a healthy pipeline that supports a mid-tier operation going forward. And what has happened is that as a consequence of our share price being lower than we believed was where it should have been, we've been a little bit more cautious in terms of our activities in populating that pipeline. So now where we have the share price improving, not yet at the point which we believe recognizes the value of the organization. Now there is an opportunity for some discipline in terms of the population of that pipeline. So we have activities through from early stage exploration to project through to potentially operations as we look to have that pipeline supporting our future mid-tier performance.So the primary change is going to be around what do we do now to refocus on this pipeline. So we did start a process in February, we are continuing to look at where it is that we believe we can create unique differences and that will be the focus of targeting both for ongoing operations and any future additions to our pipeline. I don't know if that helps, Mike?

[Mark Mihaljevic, Analyst]

Yes, that was helpful. And then I guess just on Timok, can you -- obviously you're now pushing ahead on the PFS and you had mentioned some positive impact that you saw from some of the optimization work. So can you give a little more deep color on what's going on there?

[David Rae, President, CEO, Executive VP, COO & Director]

Michael, would you take that?

[Michael Dorfman]

As you will recall from the PA that was released last year, that was focused on entirely the oxide and transitional components of the ore body. So it was really just half of the resource that really focused -- was the focus of the PA. We then took a look at the broader resource and tried to incorporate the sulphide component, which was the other half of the 2 million pounds resource, and that was -- that supported the optimization study that was completed late last year. That supported our decision to go ahead to the pre-feasibility stage based on those encouraging results and that will be complete by the end of the year.

[Operator]

[Operator Instructions] Speakers, I am not showing any other questions at this time. You may continue.

[David Rae, President, CEO, Executive VP, COO & Director]

Jennifer, are you on mute?

[Jennifer Cameron, Director of Investor Relations]

Yes, I'm here. So that's all the questions we have for today. So thank you, everyone, for joining us and we look forward to catching up with you at the next quarter.

[Hume D. Kyle, Executive VP & CFO]

Okay. Bye, everyone.

[David Rae, President, CEO, Executive VP, COO & Director]

Thank you very much. Bye, bye.

[Operator]

Thank you so much, speakers. This concludes today's conference call. Thank you all for joining. You may now disconnect.