Dundee Precious Metals Inc

TSX:DPM

Earnings Call Transcript 2023-Q1

[Operator]

All right. Good day, and thank you for standing by. Welcome to the Dundee Precious Metals First Quarter 2023 Earnings Results Conference Call. At this time, all participants are in listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded.

I would now like to hand the conference over to your speaker today, Jennifer Cameron. Please go ahead.

[Jennifer Cameron, Director, Investor Relations]

Thank you, and good morning. I'm Jennifer Cameron, Director, Investor Relations, and I'd like to welcome you to our first quarter conference call. Joining us today are members of our senior management team, including David Rae, President and CEO; and Navindra Dyal, Chief Financial Officer. Before we begin, I'd like to remind you that 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 that we will be referring to are not measures recognized under IFRS and are referred to as non-GAAP measures or ratios. 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. And please note, unless otherwise stated, operational and financial information communicated during this call are related to continuing operations and have generally been rounded, references to 2022 pertain to the comparable period in 2022, and references to averages are based on mid-point of our outlook or guidance.

I'll now turn the call over to David Rae.

[David Rae, President, Chief Executive Officer]

Thanks, Jennifer. Good morning, and thank you all for joining us. As you've seen from our news release circulated last night, our first quarter was an excellent start to the year as we delivered strong production and financial results. This morning, I'll briefly review the highlights from our first quarter results and discuss why we believe DPM continues to be well-positioned to deliver value to all our stakeholders now and over the long term. Highlights from our first quarter include solid production of approximately 69,000 ounces of gold and 7.2 million pounds of copper. All-in sustaining costs at $872 per ounce of gold sold, which continues to rank us amongst the lowest gold producers of our spies, strong free cash flow generation of $65 million, and exceptional exploration results at Čoka Rakita in Serbia as well as Tierras Coloradas in Ecuador.

With production at each of our operations expected to increase for the balance of the year, we're in a strong position to deliver our 2023 guidance. We exited the quarter in a very strong financial position with a cash balance of $473 million, which does not include proceeds of approximately $56.5 million related to our divestment of B2Gold shares following this acquisition of Sabina. And we continue to deploy our capital in a disciplined manner. In addition to investing in our future growth and exploration prospects, we returned approximately 24% of our free cash flow to shareholders through our sustainable quarterly dividend and enhanced share buyback program, which Navindra will touch on shortly. Looking at our operations in more detail, Chelopech continued its track record of strong performance in the first quarter, producing approximately 35,000 ounces of gold and 7.2 million pounds of copper. Gold production was in line with our expectations, while copper production was slightly lower than planned due to lower copper recoveries. We expect grades and recoveries to be higher for the balance of the year in line with the plan, and Chelopech is on track to achieve its guidance for 2023.

We continue to focus on extending Chelopech's mine life through our in-mine and brownfield exploration programs. In March, we announced our year-end mineral reserve and mineral resource update along with the life of mine plan update that extended Chelopech's mine life to 2031. In the first quarter, we continued to advance our brownfield exploration program with 7 rigs focused on the drilling campaign at Stetipetka as well as testing conceptual targets on the Ibraveni exploration license and testing deeper extension of the Chelopech deposit. With increase in mine and brownfield exploration drilling, we believe there is strong potential to continue our track record of extending mine life at Chelopech's. Turning now to Ada Tepe. The mine delivered a near-record level of production in the first quarter, producing approximately 33,000 ounces of gold. All-in-sustaining costs of $486 per ounce of gold sold were below the low end of its guidance range.

Ada Tepe has consistently outperformed our expectations since commissioning in 2019, and we are confident that Ada Tepe will continue to deliver strong results, supported by the updated life of mine plan we announced in January. We're also continuing our exploration efforts around Ada Tepe. And during the first quarter, our activities were focused on target delineation for the Surnak and Kupel prospects within the mine concession and the current Kupel prospect located within maturity exploration license. At Surnak, complex concentrate smelted during the quarter was approximately 50,000 tonnes, which was below our expectations as a result of unplanned maintenance in the off-gas system. Cash costs were $392 per tonne, which reflect our efforts during the year to optimize and increase efficiencies, primarily around the reduction of costs. That initiative will continue. We're planning to undertake additional maintenance in the off-gas system concurrently with the Osmo furnace maintenance during the third quarter, which is expected to result in improved quarterly performance and Surnak remains on track for its 2023 guidance.

Turning to our development projects. I'll start with our activities in Serbia. In January, we announced a new high-grade discovery at the Čoka Rakita prospect, located 3 kilometers southeast of the Sunark project, where drilling has defined a large high-grade footprint with significant upside potential. In mid-April, we showed additional assay results, which extended the deposit to the east and confirmed and extended the high grade. So copper gold mineralization has also been identified at depth. We're following up on these results with a 40,000 meter infill and extensional drilling program in this year to support the maiden mineral resource estimate for Čoka Rakita, which we have targeted -- targeting by the end of the year. We're also planning to drill approximately 10,000 meters of the Uncoexploration license, which is located 5 kilometers south of Čoka Rakita, and potential drilling on new targets, which show a similar geological environment.

Čoka Rakita has several positive attributes that we look for in projects, including a very high-grade core, good initial metallurgical results, strong infrastructure, and a great fit with our skill sets, resulting in significant potential within our organic growth portfolio. We're excited about this new development in a region where we have built strong relationships and where we have had a local and regional presence for many years. Turning to Loma Larga in Ecuador, drilling activities as well as the Citizens' participation process for the environmental impact assessment remain post, pending the outcome of the appeals process related to the decision on a constitutional protective action following the hearing held in mid-October. The decision on the appeal is expected to provide clarity on the consultation process and whether an indigenous consultation could be completed in parallel as we originally planned or would need to be completed prior to resuming the Citizens' participation process. The expected timing for a C2B environmental license is subject to the outcome of the appeal process.

We are currently leveraging our significant operating expertise at Chelopech to explore additional optimize opportunities for the project, and these are being included in an updated feasibility study, which is targeted for the second half of 2023. As we advance the project, our approach will benefit from our firm commitment to the highest standards for engagement with local communities and environmental stewardship in addition to our operating experience expertise to unlock the significant potential of the project. We continue to progress discussions with the government of Ecuador regarding an investor protection agreement. This agreement is substantially complete and is progressing through the approvals of the various ministries. In February, we were pleased to share results from a 2,700-meter drilling program at our Tierras Coloradas concession, which is located 200 kilometers south of Loma Larga in Ecuador's local province. The results confirm the presence of 2 high grain fit grade vein systems that remain open in multiple directions. Given these positive results, we are planning an expanded 10,000-meter drilling program, which is expected to commence in the second half of the year.

In closing, our first quarter results demonstrate the strengths that caused DPM to stand out in the gold industry. These highlights include strong consistent production from our operations and an all-in sustaining cost that ranks the on the lowest in the gold industry, a robust free cash flow profile, supporting our financial strength and flexibility, a record of disciplined capital allocation, and returning capital to shareholders. Attractive development projects, proven exploration success, both in extending mine life at our operations and discovering new brownfield opportunities, strong ESG performance and a track record of securing social license to operate, and, of course, a strong leadership and technical team with a history of adding real value through innovation. I'll now turn the call over to Navindra for a review of our financial results and outlook, following which we will open the call to questions.

[Navindra Dyal]

Thanks, David. This morning, I will discuss our financial highlights for the quarter and provide an overview of our balance sheet and capital allocation program, highlighting how the company continues to be very well positioned to reinvest in our business while also returning a significant percentage of our free cash flow to shareholders. As Dave mentioned, the company delivered strong performance at Chelopech and near-record-level production at Ada Tepe. Looking at our key cost measures. First quarter all-in-sustaining costs of $872 per ounce of gold sold is 27% higher than the prior year, due primarily to mark-to-market adjustments to share-based compensation expenses as a result of our strong share price performance, which impacted all-in-sustaining costs by approximately $100 per ounce of gold sold and which was not reflected in our 2023 guidance as well as higher treatment and freight charges, lower byproduct credits as a result of lower volumes and prices of copper sold, higher labor costs and higher prices for direct materials, all of which were partially offset by higher volumes of gold sold and a stronger U.S. dollar.

Our all-in-sustaining cost for the year is expected to be in line with our guidance. At Surnak, cash cost per ton of $392 was 18% lower than the corresponding period of 2022 due primarily to a stronger dollar and lower labor costs as a result of a cost optimization initiative we undertook last year. Looking at capital expenditures. Sustaining capital expenditures of $7.7 million were 12% lower than the corresponding period in 2022 and were in line with expectations. Gross capital expenditures were $6.5 million compared to $6.1 million in the prior year due primarily to activities related to the Loma Larga gold project.

Turning to our financial highlights. Revenue of $155.8 million was comparable to the prior year as higher volumes of gold sold at Ada Tepe were mostly offset by lower revenue at Chelopech as a result of lower volumes of metal sold, higher treatment, and freight charges at lower realized copper prices. Net earnings were $46.6 million or $0.25 per share compared to $26.8 million or $0.14 per share in the prior year due primarily to higher volumes of metal sold and a stronger U.S. dollar, partially offset by higher share-based compensation expenses as a result of our strong share price performance during the quarter, higher local currency mine operating costs and royalties and higher exploration expenses as planned. Net earnings in the prior year also included restructuring costs related to the cost optimization initiative at Surnak. First quarter adjusted net earnings of $46.1 million increased compared to $37 million in the prior year due primarily to the same factors impacting net earnings, except for the Surnak restructuring costs, which were excluded from adjusted net earnings in the prior year.

In terms of our cash flow metrics, first quarter cash flow provided from operations before changes in working capital was $75 million, and free cash flow, which also reflects outlays for sustaining capital was $65 million. These results were both higher than the prior year, largely due to the same factors impacting earnings before income tax. Looking forward, our 3-year outlook as shown on Slide 16 highlights our strong gold production profile and attractive all-in sustaining costs and positions us well to generate significant free cash flow. It also highlights the benefit of additional low-cost production from Ada Tepe as a result of the optimized life of mine plan we shared in January, which are reflected in our 3-year outlook for gold production and all-in sustaining costs. The updated life of mine plan for Chelopech, which we announced at the end of March was consistent with our 3-year outlook and it, therefore, remains unchanged from what we issued in February. We remain on track to achieve our guidance for 2023 as outlined on Slide 17.

Turning to Slide 18. We continue to deploy our capital in a disciplined manner that balances our desire to reinvest in growing and optimizing our business with our commitment to returning capital to our shareholders. In addition to investing in our future growth and exploration prospects, we have continued to pay a quarterly dividend in 2020, which offers an attractive 2.1% yield based on the current DPM share price. In 2022, we repurchased approximately 2.5 million shares under our NCIB program. And in February of this year, we announced that our Board had approved a new share buyback program to repurchase up to $16.5 million of the company's shares or up to $100 million over a 12-month period. As a result, we returned approximately $15.9 million or 24% of free cash flow in the first quarter, consisting of the repurchase of approximately 1.3 million shares under our NCIB for a total value of approximately $8.3 million and $7.6 million in dividends paid. Combined, this translates to approximately $250 per ounce of gold sold for the quarter.

In April, we returned another $8.3 million through share repurchases, resulting in an aggregate 2.4 million shares repurchased at a total cost of $16.6 million year-to-date 2023. As a result of B2Gold's acquisition of Sabina, we exchanged all of our ownership interest in Sabina for retold common shares on April 19 of this year. Subsequently, we have disposed of these holdings for total cash proceeds of approximately USD 56.5 billion. In closing, we delivered another solid quarter of operating performance and continued to generate strong free cash flow of $65 million. During the quarter, we increased our cash balance to $473 million, which excludes the proceeds of our Sabina B2Gold divestment. Our robust cash balance, together with no debt, an undrawn $150 million revolving credit facility, and continued strong cash flow generation positions us well to fund future growth opportunities that generate additional value for stakeholders while continuing to return capital to our shareholders.

With that, I will turn the call back to the operator for Q&A.

[Operator]

Thank you. At this time, we will conduct a question-and-answer session. [Operator Instructions] Our first question comes from the line of Wayne Lam of RBC.

[Wayne Lam, RBC Capital Markets]

Just wondering assumed, it looks like issues with the off-gas system had led to a few unplanned maintenance incidents over the past year, but you guys have done a pretty good job in optimizing the cost structure there. Can you provide a bit more detail on why there seems to be some instability there and some of the optimization initiatives that you've undertaken?

[David Rae, President, Chief Executive Officer]

Yes. Thanks, Wayne. Maybe a quick bit of history. This installation was actually done in 2013. And what we have is an outlook for replacement of some of the units in that time. What we've done is we've increased the material going through, and we've also changed some of the nature of the materials being treated. As a consequence of that, we've ended up with certain components of this one short system on the Ausmelt, which take s the gases into the dust collection system. And we've ended up with certain elements of that, having problems with the water cooling system integrity at times, which were unexpected, unfortunately, when that happens when you're in operation, there are significant things that you need to manage in terms of safety and risk to make sure that you can do a promptly and effectively. So we've made a decision that the ongoing activity in the way we do this is something that has much to be improved. And what we're going to do is actually replace the units and then do the paperwork offline. So we're actually in the process of changing to that new approach. And we believe that's going to give us greater continuity of that system and at the same time, meet with our goals of making sure that we have safety appropriately manage for our organization. So in terms of what you can expect, I would expect that to translate into greater availability and greater availability has a knock-on consequence in terms of cost. So, therefore, current cost performance can be expected to improve and production performance that performance can be expected to improve.

[Wayne Lam, RBC Capital Markets]

Okay. Great. And then maybe just at Loma Larga, maybe 2 questions. I guess the first is, it's been about 6 months since the hearing and over a year from when drilling was first paused. Just wondering what was -- what's kind of driving the delays or the drawn-out process there? And then #2, for the investor protection agreement, can you help us understand the negotiations around that? It just seems like there's a number of mines in Mexico now being advanced. And so I would have thought that it would be pretty cookie-cutter.

[David Rae, President, Chief Executive Officer]

Okay. Yes. Thanks for that question. In terms of the delay on the response on the constitutional protective action, we know that there is a backlog of court cases, which need to be reported on and the decisions taken and communicated. So that's what we're understanding is the issue. We remain confident that there's nothing fundamental that's affecting that decision and anticipate a positive response to suit. The best what I can do is I can ask my colleague, Kelly Stark-Anderson to talk about the ITC.

[Kelly Stark-Anderson]

Yes. The IPA, as we've indicated, the terms were substantially agreed with the government a number of months ago. in the current political situation in Ecuador, there has been quite a bit of turnover in various industries that we work with. We've got strong support at the ministerial level, but some of the bureaucratic processes we needed to engage with various individuals at various levels to ensure they're well familiar with the terms and conditions of the IPA and to continue to move it forward. We're having weekly, if not more frequently frequent meetings with individuals through the bureau of credit levels as well as at the ministerial levels to continue to move it forward in the political situation as it stands now, that's where our focus is, and we need to make sure we keep pushing that through. But it is, of course, part the political environment there that's creating issues.

[Wayne Lam, RBC Capital Markets]

Okay. Great. And maybe last one for me. Just on the Sabina stake sale, obviously, nice to monetize that. How are you thinking about the return from that sale? And would you consider a special dividend? And then more broadly speaking, how should we think about the growing cash balance in terms of potential to upsize the capital returns program?

[Navindra Dyal]

Okay. Wayne, it's Navindra. So I'll just answer a couple of things here. So as we outlined back in February when we issued our year-end results, the transaction between Sabina and B2Gold had already been announced. And then that was just prior to us announcing our enhanced NCIB program. So we've already taken into consideration while it wasn't a factor in terms of us upsizing the NCIB, it was -- we were aware of the transaction taking place, and we were also aware that going forward, we were probably not a holder of B2Gold shares just given our focus. So with respect to a special dividend, that's something that we have constant conversations with our Board about our capital allocation program. But as you know, we take a very, very disciplined approach to that. And we try to balance that with the needs of the business, our potential growth prospects going forward, exploration opportunities as well as a number of other factors. So with respect to a special dividend at this time, there's not been a consideration for that. And in terms of upsizing the MTB, you've seen, we've only done about $16 million worth of the current NCIB, we have the ability to go up to $100 million. We expect to perhaps continue with that over the next -- for the foreseeable future. But again, it's not a discussion we're having at this moment to consider upsizing the NCIB program.

[Operator]

Our next question comes from the line of Eric Winmill of Scotiabank.

[Eric Winmill, Scotiabank]

Great. Nice to see the free cash flow generation in Q1. Maybe just on Čoka Rakita, obviously, getting some really good results there, initial resource later this year. Can you help me understand what will be sort of the threshold you want to see there in terms of development? Or how quickly do you think you could get that into the mine plan there?

[David Rae, President, Chief Executive Officer]

Yes. So I think what we're seeing right now based on the initial drill results is we're starting to increase our confidence that this has the potential to be a stand-alone deposit. I think sub to say what the threshold is in terms of actual ounces, but we're seeing some very good grades, which give us increasing confidence in accelerating the project. In terms of timing, as I mentioned, we're targeting the initial resource by the end of the year. However, what we're doing between now and then is we're actually completing a number of other steps, which are scoping-level steps to be able to accelerate the project after we put out the resource so that we'll be able to come out with a PA fairly quickly thereafter. We're also doing geotech drilling and additional met test work as well as an initial design of an exploration decline, which could start as early as next year as well. So we're working very hard to accelerate the project. I mean I think right now, it's a little bit early to come up with an exact timeline. However, 2028 would be something that is a date that we're working for in terms of working towards in terms of production. But as I said, early days to sort of formalize that at the moment.

[Eric Winmill, Scotiabank]

Okay. Great. Super helpful. Maybe just another quick one for me. Obviously, you talked about disciplined M&A valuation, which makes a lot of sense. How should we think about that in terms of criteria or jurisdictions that might guide your search for suitable candidates?

[Navindra Dyal]

Sure. I mean I think we're -- at the moment, we're very comfortable with our organic portfolio, as we've just talked about with respect to Čoka Rakita and Loma Larga. Having said that, we do evaluate other projects with respect to M&A. We do have a good expertise in our existing region, but we'll be opportunistic if other opportunities present themselves in other jurisdictions as well, depending on the asset quality.

[Operator]

Our next question comes from Don DeMarco of National Bank Financial.

[Don DeMarco, National Bank Financial]

My question just has to do with how to kind of view the priorities in Ecuador versus Čoka Rakita. Of course, Loma Larga has the schedule, the development schedules, and subject to some delays and you've got this promising new exploration target, but then Čoka Rakita is emerging. How do you view each of those? Does one sort of take precedent over the other in terms of funding dollars going forward or precedent going forward?

[David Rae, President, Chief Executive Officer]

Yes. Thanks, Don. So it's a question that we get asked a lot, of course, as excited as we are about Čoka Rakita, we also recognize that we're progressing something that's at a lot earlier stage than Loma Larga. So Loma Larga at the moment continues to get the necessary support for us to be ready to deliver that project in the timelines that we've previously communicated. So we continue with working on the updated feasibility study set to come out in the second half of the year. We continue to progress our activities to release the current project drilling and geotech and other drilling that we want to do in this type of thing. So that's pretty much at a stage where we're looking to complete the EIA, move to an exploitation permit and actually construction project. So clearly, that remains in the sort of position 1 within our portfolio to deliver. Tierras Coloradas is very early days, but we're very happy to have found something that's exciting in proximity, but still 200 kilometers south of Loma Larga in a separate province, which does change the dynamics a little bit in terms of the potential to move that project should we have any ongoing things that we're dealing with Loma Larga.

With Čoka Rakita, there's no constraint on resourcing to either Loma Larga or Čoka Rakita, we have teams looking at how we can advance Čoka Rakita as fast as possible. And maybe an additional comment to what Michael said to Eric's question about timeline. When we talk about the decline, it's necessarily putting a decline in order to complete the work to be accepted at a Serbian feasibility level. So we're not doing that as much to advance the project. It's just a necessary part of the process. And given our interest and the way that project is developing, we're obviously interested in doing that sooner rather than later. So Loma Larga remains a priority for us. It's the one that's at the front of the queue Čoka Rakita this point is fully establishing sales at the second point. But keep in mind, Surnak is associated with that. And then Tierras Coloradas is a new entity and really comes together with the other work that we're doing in and around Chelopech and Ada Tepe.

[Don DeMarco, National Bank Financial]

Okay. Okay. And I guess as a second question and looking at your cash balance higher quarter-over-quarter and then we've got the proceeds from the sale of the B2 shares. Can you just talk about some of your capital allocation priorities is another good position to be in. But with Loma Larga spend potentially some time into the future, this cash balance could go above $600 million, $700 million before you start deploying cash in a significant way. Is that what you see, too?

[Navindra Dyal]

Yes. Don, that's definitely testing possibility of that happening. But as David said, we're definitely focused on advancing Loma Larga. And as we progress through the course of the year and we have more clarity around the timing of those processes, perhaps we come back and take another look at our cash balance, especially considering where gold prices have moved to. But certainly, the plan for now is to stick to the current plan, continue to look at their enhancement program, while making sure that we have enough cash in the business to effectively run our operations.

[David Rae, President, Chief Executive Officer]

Maybe in additional to what Navindra was saying, the burn rate in Q1 for Loma Largais also a function of the matter of work that we were doing on the development of the updated feasibility study. Obviously, as we come out of that, our burn rate will decrease. So just to comment that while we remain committed to Loma Larga, I don't anticipate that Q1 is going to be the ongoing burn rate...

[Operator]

I would now like to turn it back to Jennifer Cameron for closing remarks.

[Jennifer Cameron, Director, Investor Relations]

Thank you, everyone, for joining us today. We look forward to keeping you updated. If you have any other additional follow-up questions, please feel free to reach out. And if not, we'll talk to you next segment.

[Operator]

All right. Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.