Dundee Precious Metals Inc

TSX:DPM

Earnings Call Transcript 2024-Q1

[Operator]

Good day, and thank you for standing by. Welcome to the Dundee Precious Metals First Quarter 2024 Earnings Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand over to our first speaker for today, Jennifer Cameron, Director, Investor Relations. Go ahead, Jennifer.

[Jennifer Cameron, executive]

Thank you, and good morning. I'm Jennifer Cameron, Director of Investor Relations, and I'd like to welcome you to the Dundee Precious Metals 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 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 or ratios. 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 are related to continuing operations that have generally been rounded, references to 2023 pertain to the comparable periods in 2023 and references to averages are based on midpoint of our outlook as guided. I'll now turn the call over to David Rae.

[David Rae, executive]

Thanks, Jennifer. Good morning, and thank you all for joining us. As you would have seen from our news release circulated last night, our first quarter was a solid start to the year, a result of strong production, our low-cost structure and the benefit of higher metal prices, improving our already robust margins. This morning, Navin and I will provide a brief update on our first quarter results and discuss why we believe that DPM continues to be well positioned to deliver value to all of our stakeholders now and over the long term. Since the beginning of the year, we've had a significant amount of news flow and I'd like to take a few moments to provide some strategic context about those developments in our portfolio. First, at the beginning of March, we announced the sale of the Tsumeb smelter to Sinomine, including all assets and liabilities of $49 million. Since we acquired the smelter in 2010, it was viewed as a strategic asset in our portfolio, providing a secure processing outlook for the complex concentrate produced by Chelopech. However, with the developments in our global smelting markets, we've been able to place Chelopech at several other third-party smelters, providing secure and reliable processing at favorable commercial terms without the need to own and operate the smelter. Therefore, Tsumeb is no longer strategic to our portfolio, and this transaction simplifies our portfolio going forward and is consistent with our strategic objective of focusing on our gold mining assets. We're extremely proud of the investments that we have made to transform Tsumeb operational and environmental performance into a specialized custom smelter with a highly skilled workforce, and we'll be working closely with Sinomine to ensure a smooth transition as we advance towards closing the transaction, which is expected in the third quarter. Second, last week, we were excited to announce a significant milestone with respect to the Coka Rakita project in Serbia, sharing the results of the preliminary economic assessment, which we completed during the quarter. I'll touch on the results of the PEA and next steps for the project in more detail in a minute. But at a high level, the results from the PEA confirm our view that Coka Rakita is a highly attractive project and demonstrates the project's potential to add very high-margin gold production growth to our portfolio and generate robust comic returns. Finally, at the end of February, we decided to walk away from an opportunity we saw in the proposed transaction of Acino Resources after Osino received a superior bit. While it was a disappointing development, we firmly believe it was the right decision, one which demonstrates our disciplined approach to M&A and how we prioritize value accretion to our shareholders. We continue to prioritize M&A opportunities that we see as accretive on a NAV per share basis with high-quality assets in prospective regions and where we see a strong strategic fit with our portfolio and our capabilities. DPM has really strong fundamentals to producing assets, strong free cash flow generation, a low-cost structure, a high-quality growth asset in Coka Rakita, which we will continue to fast track for development and a strong financial position to fund our internal growth pipeline while paying a dividend. We are, therefore, in a position to be very disciplined as we assess opportunities. Turning now to our results. Highlights from our first quarter include solid production of approximately 63,000 ounces of gold and 7 million pounds of copper, all-in sustaining costs of $883 per ounce, in line with our guidance for the year, strong free cash flow generation of $62 million and continued financial stress as we ended the system -- as we ended the quarter with a consolidated cash balance of $626 million. With higher grades and recoveries expected at both operations over the balance of the year. I'm pleased to say that both mines are on track to achieve the 2024 production and cost guidance. Looking at our operations in more detail, Chelopech continued its track record of strong performance in the first quarter, producing approximately 37,000 ounces of gold and 6.7 million pounds of copper, with an all-in sustaining cost of $849 per gold ounce sold within our expectations for the quarter with improved grades and recoveries forecast for the balance of the year, Chelopech is on track to meet its 2024 guidance for production and costs. We continue to focus on extending Chelopech's mine life to its successful in-mine exploration program and an aggressive brownfield exploration program. I'd like to highlight the Sharlo Dere prospect, which is located within the Chelopech mine concession and proximal to existing Chelopech underground development, where we saw positive results from drilling last year that highlighted potential for further mine life extensions at Chelopech. We plan to follow up on those drilling results with further infill drilling in the second quarter to support potential inclusion in a mineral resource on for Sharlo Dere in the Chelopech licensing plan. Adatepic produced approximately 25,000 ounces of gold in the first quarter, in line with our expectations. All-in sustaining cost of $593 per ounce of gold sold, which was below the low end of our Ada Tepe guidance range for the year. Ada Tepe has consistently outperformed our expectations since commissioning in 2019, and we are confident that Ada Tepe will continue to deliver strong results. Turning to our development projects. I'll start with our activities in Serbia. At the beginning of 2023, we were pleased to announce this new high-grade discovery at the Coka Rakita prospect located 3 kilometers southeast of the Timok project. In the 16 months since that announcement, we have continued an aggressive infill scout drilling program completed an initial mineral resource estimate, demonstrating a high-grade 1.8 million ounce resource and published the results of the PEA. This rapid progress is not only a testament to the quality of the Coka Rakita project, but also to our exploration and technical teams. The PEA assumes the start of construction in mid-2026, with the first production of concentrate targeted for the first half of 2028. We have initiated a PFS, and we are advancing project permitting activities in support of this time line with good support and engagement from key regional and national authorities. This includes preparations for the EIA, which we expect to submit in the first quarter of 2026. What makes Coka Rakita particularly exciting is that not only is it an attractive project on a stand-alone basis with an IRR of 33% of the $1,700 gold price, but that it's also got significant exploration potential that we see across our 4 licenses. We are continuing our scout drilling program, which is focused on aggressively pursuing additional targets and following up on the positive results we published at the end of February. Overall, we're very excited by Coka Rakita's potential in a region where we have had a presence for many years and where we've developed strong relationships with local stakeholders. Turning to Loma Larga and Ecuador. We continue to progress activities related to permitting and stakeholder relations and to support the government in fulfilling the requirements of the August 2023 ruling. During the quarter, the government commenced the environmental consultation process, completed the informal phase of the process in April. An interim procedure for the prior free and informed consultation process for the Loma Larga project has been outlined by the Ministry of Energy and Mine and the baseline ecosystem and water studies are currently in progress and expected to be completed by August 2024. At the interiors Colorado concession, which is located 200 kilometers south of Loma Larga in Ecuador's Loja province, the 10,000-meter drilling program is nearing completion. This program is designed to further assess the extension and geometry of the Aparecida and La Tuna vein systems and to test other additional epithermal veins. We will continue to take a disciplined approach with respect to future investments in activities in Ecuador, which will be based on the project achieving key milestones, the overall operating environment in the country and other capital allocation priorities. Before closing, I'm pleased to share that we will be publishing our 2023 sustainability performance data supplement in the next few weeks, which we will provide a view into our performance in this key area of our business over the past year. Highlights include our progress towards our greenhouse gas emission reduction targets, environmental performance and what we've engaged with in terms of human rights. We look forward to sharing the report, which will be published on our website. To wrap up on the quarter, results demonstrate the strengths that caused DPM to stand out in the gold industry. We are a unique position, a unique position in the industry with a strong base of production, attractive all-in sustaining costs, significant free cash flow generation and the financial strength to fund our growth pipeline and exploration prospects, while at the same time continuing to return capital to shareholders. I'll now turn the call over to Navin for a review of our financial results and the outlook, following which we will open the call to questions.

[Navindra Dyal, executive]

Thanks, Dave. I'll be touching briefly on the financial highlights for the quarter, provide an update on how we are tracking in terms of our guidance for the year and conclude with some commentary on our balance sheet and return of capital program. All of my remarks will focus on results from continuing operations, and unless otherwise noted, will not include results from discontinued operations, that being the results from Tsumeb. Looking at our financial highlights from the quarter. We achieved solid performance with both mines on track to achieve their respective 2024 production and cost guidance, and we continue to deliver strong financial results, supported by a favorable commodity price environment. Highlights for the quarter include revenue of $124 million, comparable to the prior year with lower volumes of metal sold and lower realized copper prices, largely offset by higher realized gold prices and lower treatment charges at Chelopech as a result of securing better commercial terms. Cost sales of $62 million were also comparable to the prior year with higher labor costs and the timing of maintenance activities at Ada Tepe, largely offset by lower royalties at Ada Tepe reflecting lower contained ounces mined and lower prices for power and direct materials. Adjusted net earnings of $33 million or $0.18 per share was 25% lower compared to the prior year due primarily to lower volumes of gold and copper sold and higher aspiration and evaluation expenses mainly related to the Coka Rakita Gold project, partially offset by higher realized oil prices and lower treatment charges at Chelopech. Cash flow from continuing operations of $36 million was $30 million lower than the prior year due primarily to the timing of collections from customers, partially offset by timing of payments to suppliers. At March 31, 2024, we had approximately $30 million higher than normal receivable balance of at Chelopech, which related to sales made in the latter half of the quarter and all of which were collected by the end of April. Free cash flow from continuing operations of $62 million was 6% lower than the prior year due primarily to the same factors impacting earnings, partially offset by the timing of cash outlays for sustaining capital expenditures. Taking a closer look at our cost metrics for the quarter. All-in sustaining costs of $883 per ounce of gold sold was comparable to the prior year, with fee ounces of gold sold and lower byproduct credits, largely offset by lower treatment charges at Chelopech and lower prices for power and direct materials. In terms of our capital spending for the first quarter, sustaining capital expenditures were $6 million compared to the prior year of $7 million due primarily to the completion of the planned upgrade of Chelopech's tailings management facility, which was completed in the second quarter of 2023. Growth capital expenditures of $8 million compared to the prior year of $6 million due primarily to a $4 million expenditure for electric mobile equipment received at Chelopech in the first quarter of 2024, partially offset by lower planned expenditures related to Loma Larga. Our 3-year outlook remains unchanged from that reported in February, except for evaluation expenses in 2024 related to the Coka Rakita project, which is now expected to range between $30 million to $35 million, up from the previous range of $10 million to $13 million as we advance to the PFS space for Coka Rakita,which is expected to be completed by the first quarter of 2025. We continue to maintain a strong balance sheet and cash position with a consolidated cash balance of $626 million, which includes the cash held at Tsumeb, no debt and a $150 million undrawn credit facility. We have the financial flexibility to fund growth opportunities that generate additional value for stakeholders while continuing to return a portion of our free cash flow to our shareholders. Turning to shareholder returns. 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. The company renewed its share buyback program towards the end of March, which includes the purchase of up to $15.5 million of the company's shares, representing approximately 9.8% of the public float as of March 6, 2024 and over a period of 12 months commencing March 18, 2024. And we continue to pay a quarterly dividend, which currently offers an attractive 2% yields based on last night's closing share price. During the first quarter, the company repurchased 253,000 shares at a total cost of $1.9 million under the share buyback program and paid $7.2 million or $0.04 per share of dividends, representing an aggregate return of 15% of our free cash flow to shareholders. In closing, we continue to deliver strong performance from our mining operations and are on track to achieve our full year guidance. We have a solid cash position, and we expect to continue our track record of generating significant free cash flow. With that, I will turn the call back to the operator for Q&A.

[Operator]

Thank you. At this time, we will conduct our question-and-answer session. [Operator Instructions] Please stand by while we compile the Q&A roster. And our first question comes from Wayne Lam of RBC.

[Wayne Lam, analyst]

I was just wondering at Coka Rakita, in terms of the permitting time line that you guys have set forth and I guess, the 6 months between EIA submission and intend receipt, just wondering if there's any precedence in country in terms of that permian time line that kind of informs your confidence on that time frame?

[David Rae, executive]

Good to talk to you. So it's -- what we've done is we've been working with the government pretty closely in terms of the time line. So the comment was that we'll submit the EIA in the first quarter of 2026 and anticipate moving forward with construction sort of midyear, it's sort of the thinking. We're working actively with the government and there's a good intent to try and advance piece thing. So it's not that it's this point interesting later. We're looking at the opportunities to advance. The other thing is that we're in conversation with the authorities right the way through the activities that we're doing and the work that is required in order to have a constant EIA, which can then get a positive decision. So I wouldn't sort of read too much into the 6 months between those 2? And does that then push us back to later in the year in 2026. Our intent is as early as possible in 2026 make that construction decision. Are there precedents? There's been precedence in terms of timing from pre-feasibility through to production with the last mine that was built in country. So as a consequence of that, we're quite confident that we can achieve an accelerated path to a construction decision. But like I said, we're working with the authorities to make sure there are no surprises and we're well prepared and ready.

[Wayne Lam, analyst]

Okay. Great. And then maybe just wondering in terms of multi terms, given the tightness in concentrate supply. I was just curious what kind of cost savings you guys are seeing on treatment charges. And then I guess, more broadly, it seems like a number of factors seem to be going your way on the cost side. I'm just wondering if in the coming quarters when you guys see higher grades, if you guys might be seeing any upside or improvement versus where guidance was set.

[Navindra Dyal, executive]

Yes, with respect to treatment charge, certainly when it comes to Chelopech and as we look forward to their treatment charges that they incur or Chelopech incurs, we're seeing -- we're definitely seeing a benefit for the market. The way we typically price or contract out with our customers, we start the process late the previous year. And then we continue that through the current year as we look forward to shipments later in the year. So certainly, as we look to the second half of the year, we expect to see a greater benefit of treatment charges where retreatment terms as we progress through the year. On the flip side, when it comes to Tsumeb, obviously, it's been challenged because of the same market. as Dave mentioned earlier. When it comes to cost benefits, certainly, as I mentioned, we are seeing the benefit of lower power costs, and we are seeing some of the benefit of lower costs for certain direct materials, particularly with respect to cement and certain of our other reagents as well. And so yes, we could end up seeing a bit of a benefit on our all-in sustaining costs as we progress through the year. But for now, we're maintaining our guidance just in light of everything else that's going on globally.

[Wayne Lam, analyst]

Okay. Great. And then maybe just last one for me. Just given the amount of cash you guys are putting on the balance sheet, at what point do you guys consider an increase in the dividend here? Or is there any potential to even provide a special dividend given the amount of cash building on the balance sheet? Or are you guys kind of saving that for any future CapEx needs or potential M&A?

[Navindra Dyal, executive]

Yes. We think about that all the time, especially in light of this current commodity price environment, certainly, that's a question that's top of mind for our -- the management as well as the Board. We've currently maintained this dividend. We've doubled it actually since we initiated it back in 2021. But as we look forward to our capital allocation, and we remain disciplined around ensuring that we have enough cash within the business to -- for our projects for our exploration programs, especially with -- in light of Coka Rakita, but we also have a view of returning a certain amount of that cash toward shareholders. So that is something we consider as we meet with our Board and discuss that with management.

[Wayne Lam, analyst]

Okay. Great. Well, certainly, a great position to be in.

[Jennifer Cameron, executive]

Operator is there another question?

[Operator]

I'm sorry. Our next question comes from Raj Ray of BMO.

[Raj Ray, analyst]

My first question is a follow-up on Wayne's question on capital returns. So Dave. So Q1, the share buybacks were a little bit on the lighter side compared to what you did over 2023. Is there a reason? I just wanted to know that you still see value in the stock at these kind of prices and whether you expect to keep buying. So that's my first question. My second is on your growth pipeline. It's great to see Coka Rakita coming online in 2028. Still have the gap from 2026 to 2028 in terms of potential production drop once alot its course. Are you still thinking of filling the gap. I mean there any potential you see in terms of extending out the -- I know you have said in the past maybe a few months, but has anything changed? Those are my I do have a third one with respect to the Coka Rakita commercial discovery license that you received in Jan 2024. Can you touch upon what are the next steps for that?

[Navindra Dyal, executive]

Thanks, Raj. I'll start with the first one. So the buyback program started in late March. We only reinstalled our program in -- on March 18. So that's why the share buybacks were a bit lighter as well. The reason we didn't have like an automatic repurchase going on during the year, January, February month as well as -- we were essentially working towards the Smeal during that time as well. So we were essentially prohibited from making those types of transactions during that time. So the buyback is a bit lighter in Q1 because -- mainly because we reinitiated that NCIB program late March. So that's an answer to that. And then Dave?

[David Rae, executive]

So in terms of your question about [indiscernible], I'll take that one first before the growth pipeline. So it's been a bit what's happened is we've received the commercial discovery, just projecting that forward with what's necessary to complete. So there's an EIA conversation now. But ultimately, there's a conversation about receiving the concession. We would anticipate that being late 2025. Now just coming back to the last point, you're asking about the growth pipeline. So we see that as priced in to the top. So that's the first thing. But having said that, we know from the conversations that we have with the different stakeholders. This is a question that keeps coming up. Now would have been a great fit for that. So it's definitely one of the things that we would keep in mind, but it's not the overriding priority. So at the end of the day, we are looking for those options, which are a great fit with the organization in which an not per share accretive.

[Navindra Dyal, executive]

Sorry, Raj, just coming back, the latter part of your question on the buyback. So yes, we would expect to continue the buyback program this year. Again, now that we've restarted it at the end of March, we would expect to start making repurchases given where our share price is relative to what we think the value is.

[David Rae, executive]

Yes. I think what you've heard previously remains, which is that we project forward to build in cash and then look at cash use Obviously, we've had the good fortune of having success with exploration and putting some money into that. We, of course, continue the dividend. And it is a conversation is this at an appropriate level, should we be thinking about doing more. The buyback remains an option for us. We're not thinking about doing anything in terms of any special purchase on that. We buy back an option to the 2. But as we're building cash at a rate higher than we need, the intent is to use the buyback facility in order to provide additional returns to shareholders.

[Operator]

One moment for our next question. And our next question comes from Don DeMarco with National Bank Financial.

[Don DeMarco, analyst]

So first question, with the buildup in accounts receivable in Q1, did you say you expect to have this unwound in Q2 potentially lift in the cash balance? And can you reiterate what this consisted of?

[Navindra Dyal, executive]

Sure. So our production for the quarter was essentially back end weighted towards the tail end of the quarter. And so when we have our -- we ship our concentrate out to our customers, typically, what ends up happening is when it shifted to 15 days before we can collect the cash on that shipment. We get to recognize the sale at the time it shipped, but then the collection of cash is typically 15 days. And with the production being heavily tilted towards the back end of the quarter, we end up seeing a lot of our sales recognized towards the back end of the quarter, but then the receivables weren't collected until the following month. So that's the main reason for that. It's not expected to reoccur in the coming quarters. So it's your question around whether or not we might expect to see essentially most of the cash coming in from first quarter as well as the second quarter. There will be some of that. But at this point, I wouldn't comment on whether or not there would be essentially a double up in the second quarter.

[Don DeMarco, analyst]

So shifting to the Coka Rakita PEA, it looks strong. I see ASIC is 715 announced. So this looks like another high-margin mine, good replacement for adept. But can you provide some of the assumptions that support the low-cost outlook?

[David Rae, executive]

So what we've Don, here, one is we're in the fortunate position that we have an operating asset with a long operating history to fit us away. So basically, the way we've done this, all of the assumptions for underground when we look at things like development and more specifically, we talk about mining cost in terms of what you've asked. All of those are coming from what do we do at Chelopech, what do we compensate for in terms of new assets, new plays, training development, some amount of build in efficiencies over time, that type of thing. If you look at some of the other numbers, and you didn't particularly ask this question. But for instance, if you have a look at the ramp development, those are actually external costs, not our costs. So underground, it's sold based off Chelopech corrected for scale corrected for a new location, some opportunity for efficiencies. But in terms of a lot of the surface stuff at this point, as mentioned, we still got some trade-off studies. So there's some potential optimization or certainly offsets to any additional inflationary pressures that we might see. I don't know if that answered your question, Don.

[Don DeMarco, analyst]

It does to a degree. I think what it means for certain confidence in those costs because you have Chelopech not far away. But in terms of perhaps maybe mining method or grade, any color on either of those?

[David Rae, executive]

Yes. So mining method at this point, everything that we've done, including the block size in the ore body is leading to a similar practices at Chelopech, which is long-haul open stoping. Nothing really out of the order at the millidol except it has gradity concentration is a bigger part than we typically have in other operations. So anything close...

[Don DeMarco, analyst]

No, that's fine. And I get it that the resource is still evolving, you're doing more exploration. So is there opportunities to potentially upsize the throughput? I think the PEA had 2,300 tonnes per day?

[David Rae, executive]

So the way we look at it at the moment is that we've got one particular type of material at Coka Rakita, and if you go back to February, we announced something that was 1.1 kilometers away in an area slightly north, northeast of Coka Rakita. And that was looking at the models, which were at a level below the scan, which Coka Rakita is primarily formed. And that is a 26 meters of being 3.5% coping just over 2 grams sold. So that could be something that might be a slightly different circuit. So then coming back to your question, can we actually scale Coka Rakita, the way we would see it is being built in modules. So if there is some expansion, it's quite likely that, that may require a slightly different flow sheet perhaps cross-mall flows as opposed to crushing mill, gravity separation float in this type of thing. But what we find is more of the same, and we're very optimistic there's more that than that same modular approach could be used to actually increase the capacity on the same flowsheet.

[Operator]

And our next question comes from Eric Winmill of Scotia Bank.

[Eric Winmill, analyst]

Just a follow-up on the Chelopech brownfield. Apologies, I missed it earlier, but do you have any details in terms of number of rigs? Is this from surface or underground? And maybe sort of what next steps are, how much drilling you think is going to be needed to advance some of those resource targets. Appreciate it.

[David Rae, executive]

Yes. So far with the activity that we reported in Q1, the bulk of that work has been underground. So the plan is to put some surface rigs on now in Q2, as we mentioned, Sharlo Dere will be doing more work on at this point. We believe we said 2 weeks hell we're going to put in place, primarily, but it will depend on what exactly we're finding and what the opportunity is. So there's a couple of things that we're still working on in and around Chelopech. But primarily over the concession we'll have 2 weeks. That's the intent at this point. And that's inhibition are as I mentioned, to the underground work, which is typically about 45,000 meters per year. So there's 2 different sets of activities going after this.

[Operator]

At this time, we are showing no further questions. And I'd like to turn it back to Jennifer Cameron. Please go ahead, Jennifer, for closing.

[Jennifer Cameron, executive]

Great. Thank you all for joining us. If you have any further questions, please feel free to reach out. And we look forward to speaking with you in the coming weeks. Thanks, and take care.

[Operator]

Thanks, everybody, for your participation in today's conference call. This now does conclude the program. You may disconnect.