Dundee Precious Metals Inc

TSX:DPM

Earnings Call Transcript 2022-Q2

[Operator]

Good day and thank you for standing by. Welcome to the Dundee Precious Metals Second Quarter 2022 Earnings Results Conference Call. At this time, all participants are in a 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, Director of Investor Relations. Please go ahead.

[Jennifer Cameron, Director of Investor Relations]

Thank you and good morning. I'm Jennifer Cameron, Director, Investor Relations, and I'd like to welcome you to Dundee Precious Metals second quarter conference call. Joining us today are David Rae, President and CEO; and Hume Kyle, Chief Financial Officer. After the close of business yesterday, we released our second quarter results for 2022, and I 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 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.

Please note that unless otherwise stated, operational and financial information communicated during this call are related to continuing operations and have been rounded. References to 2021 pertain to the comparable period in 2021, and references to averages are based on midpoints of our outlook or guidance.

I'd now like to turn the call over to David Rae.

[David Rae, President and Chief Executive Officer]

Good morning and thank you all for joining us. I'm pleased to report that during the second quarter, we continue to deliver strong operating and cost performance at both of our mine, increased our financial strength and advanced our development project and exploration activities.

This morning, I'll briefly review our second quarter results and our operational performance before handing the call over to Hume to discuss our financial results. The highlights from our second quarter include the strong production of approximately 73,000 ounces of gold and 8.8 million pounds of copper.

Excellent all-in sustaining cost performance of $792 per gold ounce, which was towards the low end of our full year guidance. Solid free cash flow generation of $41 million and continued financial strength exiting the quarter with a cash balance of $423 million.

With strong gold and copper production and a year to-date all-in sustaining costs of $741 per ounce of gold sold, which supports the cost at or below the low end of guidance range, we are well-positioned to achieve our guidance targets for 2022.

Turning now to the highlights from our operations, I'll start with Chelopech. Chelopech had an excellent quarter with production of approximately 49,200 ounces of gold and 8.8 million pounds of copper, benefiting from higher than expected grades relative to the mine plant, as well as recoveries above historical averages, which reflect process improvements we have implemented.

For example, we continued to refine the implementation of an advanced process control solution, which is resulted in greater process efficiencies, reduce variability and improve recoveries at our mine. And we're also implementing that at the moment.

All-in sustaining costs for the quarter was $838 per ounce of gold sold, which increased compared with the previous quarter, primarily due to higher treatment charges and rate. Chelopech remains on track to achieve its 2022 production and cost guidance for the year.

We continue to focus on extending Chelopech's mine life to our successful in-mine exploration program and a growing Brownfield exploration program, which for 2022 includes proximately 44,000 meters in-mine drilling for mineral resource development and that's typical of our spend and activity around in-mine exploration.

And further, we've got approximately 50,000 meters of Brownfield exploration, which are primarily concentrated on near-mine exploration drilling related to the Sveta Petka commercial discovery application, as well as drilling at Sharlo Dere and other near-mine targets in the mining concession area.

We ramped up an extensive drilling campaign focused on Sveta Petka, as well as the Sharlo Dere and Petrovden prospects within the mining concession, drilling over 20,000 meters during the second quarter. The drill campaign, which is planned to support an application for a commercial discovery at Sveta Petka in 2023, is planned to continue for the balance of the year.

With a mine life that extends to 2030, an updated mineral resource base and increase in mining and Brownfield exploration drilling, we believe there is strong potential to continue our track record of mine life extension at Chelopech.

During the first quarter, Ada Tepe has produced approximately 23,700 ounces of gold at an all-in sustaining cost of $714 per ounce. So, for the mine plant, we are focused on completing pushback 2 [ph] in the first three quarters of the year, with grades expected to increase in the fourth quarter.

With production in line with our expectations in the first half of the year Ada Tepe is on track to achieve its 2022 guidance. We are continuing to assess the results of the accelerated grade control program at Ada Tepe.

The drilling was completed in January 2022, and initial information for the 2022 mining areas was reflected in our production guidance for 2022. We are in the process of incorporating these results into an optimized mine plant, which is expected to be completed in the third quarter of 2022.

We are continuing our exploration efforts around Ada Tepe with 20,000 meters of drilling plan in 2022, which will be focused on near-mine target delineation and drilling within the mine concession and surrounding Krumovitza exploration mine.

During the quarter exploration activities were focused on an extensive target delineation campaign that encompass the Ada Tepe mine concession and regional mine. Work included detailed mapping, rock sampling, trenching and 3D modeling, which is now being followed up with diamond drilling.

Turning to Tsumeb. Q2 performance reflects the plant of Ausmelt maintenance, shutdown completed during the quarter, which was extended by 15 days to address cooling system off-gas and baghouse system integrity, which is expected to improve operational performance post the shutdown.

As Hume will discussed we have revised guidance. Ausmelt reflecting its performance year to-date and our expectations for the balance of the year. We continue to engage in a comprehensive initiative directed that optimizing the cost structure of the Tsumeb smelter to enhance its ability and to compete for additional third party supply of complex concentrates and improve overall business profitability.

In terms of our future growth, we continue to advance the Loma Larga project, recently of achieving a milestone with the receipt of Technical Viability Certificate for the filtered tailings storage facility. This follows the technical approval of the EIA, which we received in April.

As we previously reported, we paused our plant drilling activities near the end of February pending the hearing of a constitutional protective action against the Ministry of Environment.

Last week, we received the written decision by the judicial Labor Unit of Cuenca, which upheld the validity of the environmental permits for exploration, confirmed that the ministry did not violate certain rights relating to water and nature in granting DPM its permits and reaffirmed our legal rights to the mining concessions.

The court also found that DPM will be required to include local indigenous populations in its consultation process prior to advancing to the exploitation phase, which we had already planned as part of our development of the project.

DPM is committed to advancing the project in line with the highest standards for stakeholder engagement, which includes aligning our approach with International Finance Corporation practices, which meet or exceed Ecuadorian spend.

Our drilling activities remain paused at Loma Larga as we seek clarification from the court whether the indigenous consultation can be done in parallel with the citizens participation process.

The next step in the process to obtain the environmental license or whether it must be completed before adapting those activities. This could potentially delay the timing of receipt of the environmental permit, which we expected to receive in the third quarter.

In parallel with permitting, we have also continued our work to optimize the feasibility studies for Loma Larga and progress with several trade off studies aiming to further improve the project based on our expertise and experience. As we advance the project, our team is proactively working with stakeholders to obtain the project social license.

We have increased our dialogue with local stakeholders to provide more visibility to certain aspects of the project that are of high interest in the local community and we're maintaining a constructive dialogue with all government, institutions involved in the development of projects.

In Serbia, we continue to progress the feasibility study, as a result of optimize -- as the results of optimization activities focused on capital expenditures and mining activities, we now expect to complete the feasibility study in the third quarter.

As we advance the work, we are seeing inflationary pressures on capital and operating budgets that are consistent with general industry trends. Following completion of the study, we plan to pursue additional exploration opportunities subject to receive the require terms.

To wrap up on the quarter, our strong production profile and significant free cash flow generation combined with our operating track record and strong ESG performance, position us well to continue delivering value for all of our stakeholders.

We are committed to deploying our capital in a disciplined manner, as we have demonstrated with our investments in optimizing our assets and advancing our organic pipeline.

We also continue to pay a sustainable quarterly dividends and repurchased approximately 1.6 million shares in the first six months of the year. We are confident that DPM's strong fundamentals continue to represent a compelling value opportunity for investors, particularly in current share price levels.

I'll now turn the call over to Hume for a review of our financial results and outlook following which we will open the call to questions.

[Hume Kyle]

Good morning, everybody. Thanks, Dave. I'll begin by reviewing our second quarter financial results, after which I'll touch on our three-year outlook, financial position and capital allocation.

For the second quarter and first six months of 2022, we generated adjusted net earnings of $33 million and $70 million or $0.17 and $0.37 per share respectively, compared with $67 million and $98 or $0.37 and $0.54 per share in the corresponding periods for 2021.

For the quarter, this decrease was primarily attributable to the timing of the maintenance shutdown of Tsumeb, lower volumes of metal sold, and higher freight charges at Chelopech partially offset by higher than normal metal recoveries at Tsumeb and a stronger U.S. dollar and higher realized metal prices and sulfuric acid prices.

Our six month results were also impacted by lower throughput at Tsumeb related to issues with the bank hosted off-gas system prior to the maintenance shut and higher share based compensation due to changes in DPM share price, which were partially offset by lower treatment charges.

Net earnings attributable to common shareholders for the second quarter and first six months of 2022 were $34 million and $60 million respectively, down from $68 million and $88 million in 2021, due primarily to the same factors that affected adjustment earnings, as well as Tsumeb restructuring charge taken in the first quarter.

In terms of our cash flow metrics, in the second quarter in the first six months of 2022, cash flow from operations before changes in working capital was $56 million and $117 million, while free cash flow was $41 million and $90 million respectively. These results were both lower than the corresponding periods than 2021 due primarily the same factors that were impacting earnings, partially offset by lower outlays for sustaining capital.

Turning to our cost measures. Overall in the second quarter and first six months of 2022, consolidated all-in sustaining costs was $792 and $741 respectively, up 31% and 27% relative to 2021 due primarily to higher costs, lower volumes of gold sold, and lower byproduct credits in Q2, which were partially offset in both periods by a stronger U.S. dollar and lower treatment charges.

Our mining and our all-in sustaining costs were up over 2021 levels reflecting the inflationary pressures that are impacting prices globally and in particularly are impacting European power prices, as well as costs for transportation, fuel and other direct materials. They're both well within our guidance and reflect our continued focus on managing our costs, as well as the favorable impact of the Bulgarian government power subsidy and the strong U.S dollar.

In fact our Q2 mine and all-in sustaining costs came in at the low end of 2022 guidance and year to-date are at or below the low end of our guidance Tsumeb Q2 cash costs per tonne was $973, up $573 compared to 2021, due principally to the timing of the Ausmelt furnace maintenance, which occurred in the second quarter of 2022 versus Q1 in 2021.

Cash cost per tonne of complex concentrates smelted in the first six months of 2022 was $632. This was $74 higher than 2021, due primarily to lower volumes of complex concentrates smelted.

This was related to increased maintenance activities in respect of a smelter and baghouse and off-gas systems that reduce available capacity during the first six months of the year. And this was partially offset by higher assets byproduct credits and labor savings stemming from Tsumeb cost reduction Initiative.

From a CapEx standpoint, sustaining CapEx incurred during the first -- sorry second quarter, and first six months for 2020 were $21 million and $30 million respectively. This compared with $12 and $29 million at 2021, with Q2 increases, primarily related to the timing of maintenance shutdown at Tsumeb.

Growth CapEx occurred during the second quarter and first six months were $8 million and $14 million respectively, compared with $4 million and $6 million in 2021, and this is due primarily to our development activities that Loma Larga and Timok.

Looking ahead to the balance of the year at Chelopech and Ada Tepe, we are forecasting production that is expected to be at or above the level achieved in the first half of the year, putting us well on track to achieve our 2022 production, as well as our mine and all-in sustaining costs guidance.

For Tsumeb, we revised our production cost guidance to reflect the impact of increased maintenance activities to the baghouse and off-gas systems in the first six months of the year, which has now been resolved. Over the balance of the year we expect stronger operational performance from Tsumeb with 2022 production now expected to be between 185 and 200,000 tonnes which is down roughly 15% from our prior guidance of 210 to 240,000 tonnes.

Cash costs guidance has also been updated and is now expected to range between $420 and $480 per tonne, up roughly 7% from the $380 to $460 per tonne range previously put out and this is reflecting lower year to-date throughput, partially offset by a stronger U.S. dollar and increased cost savings stemming from Tsumeb s initiative to optimize its cost structure, which for 2022 is expected to reach approximately $10 million.

In 2022, these savings will be partially offset by additional costs being incurred to support among other things, executing this initiative, re-optimizing work management practices and ensuring that there's a continued strong focus on safety during this period of change. Our outlook for 2023 and 2024 remains unchanged.

In closing, we delivered another strong quarter of operating performance from our mining operations. And we are well on track to achieve our annual 2022 guidance, and in turn add to our year to-date free cash flow generation of $90 million.

As part of our overall capital allocation framework, we continue to allocate a portion of our free cash flow to shareholders in the form of a sustainable quarterly dividend that currently provides investors at 3.3% yield and selectively just buy back shares under our Normal-Course Issuer Bid.

For the first six months of 2022, we deployed approximately $10 million towards share buybacks and $13 million towards dividends for a combined total of $23 million or 25% of our year to-date free cash flow, but the cash position of $423 million at June 30, no debt and continued strong free cash flow generation, we are well-positioned to fund future growth opportunities to generate additional value for stakeholders while returning a portion of our free cash flow to shareholders.

With that, I will turn the call back to the operator for questions.

[Operator]

Thank you. [Operator Instructions] Our first question comes from Trevor Turnbull with Scotiabank. Your line is now open.

[Trevor Turnbull, Scotiabank]

Hi. Thank you, David. I just had some questions on Ecuador. The feasibility study that's still expected this year was originally going to utilize that 15 kilometer drill program you talked about for optimization studies. And I just wondered the fact that that's been on hold due to some of the court challenges. How that might impact the timing of the feasibility or what it might be if you carried out the feasibility without that drilling?

[David Rae, President and Chief Executive Officer]

Yes, good morning, Trevor. Good to question. So the budget for that drilling covered a number of different things. So the last element of that would be extension, the main part was hydrogeology, condemnation drilling, geotech. And primarily, that's about understanding whatever we need to still learn about the foundations and the earthworks and the sort of management of the different things around the construction of the plant. So that really needs to be done. It's too risky to go ahead and construct the plant without having that basic information. That doesn't means by which you can have runaway costs. So, we do wants to complete the condemnation and the geotech in particular of that work.

So there is some potential that this could stay continues to be caught activity and holds on our ability to drill. It is possible that this could delay output on timing for the completion of the feasibility study, and then the onset of construction for the project subject to getting the exploitation line.

[Trevor Turnbull, Scotiabank]

Okay. Yes. It sounded like there was a lot of de risking that could be done through this drilling, just like you said, knowing exactly what conditions would be like prior to construction and so forth. Just sticking with Ecuador, my only other question was, if you could just talk a little bit about some of the headlines, and we've been seen out of Ecuador. It looked like there was a draft agreement after all the unrest between the government and the confederation of indigenous groups. And from what I can tell reading some of the media stories, it sounded like there would be no development in areas deemed ancestral territories as part of the draft agreement anyway.

But the problem with that seemed to be that those areas aren't really defined anywhere. And I'm just trying to understand how, as the government and these groups try to grapple with understanding where the ancestral territories are, and that ambiguity. How does that bog down the ability to kind of move forward on the permitting?

[David Rae, President and Chief Executive Officer]

I think for us, we're in a situation where this particular project relative to some others, which are being advanced at the moment are working on a sort of set of assumptions, which are not the same as the say for the current project. So what we're looking to see is how this transpires in terms of the negotiations between the government and the different parties. The way we're looking at this is that we have a consultation requirements with the indigenous population, which we would of course, always do. We have a consultation for which the processes in agree prior to the current conversation about indigenous stakeholders, and that we're actually ready to go on the moment that we get additional clarification on the ruling. Kelly, I don't know, if you want to add anything to that?

[Kelly Stark-Anderson]

Yes. I'd happy to add to that. I'm Kelly Stark-Anderson. I'm Executive Vice President, Corporate affairs and General Counsel, and have a great deal of involvement with our Ecuador project. What you're speaking to is the discussions with the governments following the recent protests. We'll be looking at Decree 151, which President Lassoput in place to promote the development of mining and the discussions to limit some of that, as it may impact. As you've noted, ancestral lands, those discussions are continuing. And I see the government, obviously, is very focused on ensuring proper process and respect for rights and interest. We don't have and don't believe we would be impacted by any discussion that relates to ancestral lands.

Certainly, however, we are deeply committed to the engagement process, the consultation process, and even prior to the decision of the court saying that the consultation process needed to be followed to move to exploitation, we had built that into our planning to the standard of the IFC, which is well in excess of the current Ecuadorian requirements. So, we're comfortable that what the government needs to do and the discussions it's having are not a risk to the project.

[Trevor Turnbull, Scotiabank]

Okay. Yes, I appreciate that. I guess it's clear the government has their hands full. And it'll kind of depend, I guess, on how they're able to navigate these next few months in terms of keeping everything from getting out of hand with respect to further protests and so forth. But I appreciate the color and that's all I had. Thank you.

[David Rae, President and Chief Executive Officer]

Thank you.

[Operator]

Thank you. One moment for our next question. And our next question comes from Don DeMarco with NBF. Your line is now open.

[Don DeMarco, NBF]

Well, thank you, operator, and good morning, everyone. While we're talking about Ecuador or maybe if I could just ask one more question on that. So gentlemen, you've received the decision from -- a written decision from the court. And my questions are. Has there been any appeals against this decision? And when would you expect to receive clarification regarding the need to conduct a consultation, indigenous consultation in sequence or in parallel? And then finally, with this indigenous consultation, how long would that process itself potentially take and what might it involve?

[Kelly Stark-Anderson]

I can speak to the first part of that question. Various parties to the proceedings filed clarification requests this week to the court, which asks for, for example, from the company side in alignment with the Ministry of the Environment, the question was about, as Dave indicated whether or not we could continue with the permitting activities in parallel to the required indigenous consultation and seeking clarification on the lifting of the precautionary measure that suspended our drilling activities. The judge has advised all the parties with the filed clarification requests and if there is a period of a few days in order to for other parties to file any additional commentary to those requests, following which the judge will respond.

Now, there is no defined timeframe for the judge to respond. We do believe that he will deal with this expeditiously. However, there is beginning August 1, a judicial annual leave period of two weeks. So, we're not sure at this point, whether the judge will continue with the case during that timeframe or if we will have to wait till after August 15 for it to continue. Once he has issued his responses, there is a three-day period for the ability to appeal any aspect of the ruling.

And following that, the indigenous consultation process will unfold. What we are -- have one of the aspects of the clarification is to get a better clarity on the exact scope of the consultation to communities, the indigenous consultation is not an individual, rights. It's a community rights. So that needs to be defined a little further and from there we will have a better understanding of the scope of that consultation. The timeframe for that will be unfolding. And as I say is already part of the engagement plan. So we don't see it extend beyond our current timeframe looking for the environmental permit to be issued, as I say we had expected in the third quarter. And should we get resolution with the clarification requests and the decision expeditiously, we don't see why that wouldn't unfold as expected.

[Don DeMarco, NBF]

Okay. Wonderful. Well, thank you. That's very helpful and very clear. So moving on to my other questions on a different topic. So, following completion of the Timok feasibility study, it was indicated that you plan to continue drilling. I didn't read that you would consider developing it or there was a go forward decision upon conclusion to the FS. So, is it fair to say that at this point, there are no plans or the FS is not to provide the basis for making a decision whether or not to develop it?

[David Rae, President and Chief Executive Officer]

So, the completion of the feasibility study needs to meet our hurdle rights. So what we do is, complete that work. So at this point we have a number of indications of capital and operating costs, which we are busy looking on it and taking into account any considerations given our experience in the region that may not always be there in terms of the way engineering company is not based in that area, it might be citizens. But the bottom line to your question is, we receive that piece of information, make a decision on our criteria, and what we think is something that we want to invest in going forward. So, it's obviously a key decision point. We're not just going to continue it for the sake of continuing. It has to meet our criteria.

[Don DeMarco, NBF]

Okay. Thank you for that. And well, congratulations on a strong free cash flow quarter. And that's all for me.

[David Rae, President and Chief Executive Officer]

Thanks, Don.

[Operator]

Thank you. One moment for our next question. And our next question comes from Raj Ray with BMO. Your line is now open.

[Raj Ray, BMO]

Thank you, operator. Good morning, David and team. My first question is regarding one of the comments that you've made with respect to the second half outlook for the mining operations. And you said, it's going to be at or better than the first half. Just wanted to get a sense of the cost inflation. Did you see the peak of the cost inflation of Q2? And has its been gone into Q3. Do you expect additional pressures? Or do you think we are -- cost inflation is always going to decline? Just wanted to get some sense there?

And my second question was on the treatment and transportation charges for Chelopech. There's a wide variability. Now, I know you did mention the increase in freight costs and whatnot. But those $37 million in Q2 versus $15.5 in Q1. Just wanted to get a sense for the remainder of the year what's the expectation? Is there anything else other than just the freight and transportation costs that's affecting that?

[David Rae, President and Chief Executive Officer]

Okay. So balance of year, yes, like we're -- our forecast is based on the pricing environment that we're seeing currently. So like, based on the last forecast that would have been probably about a month ago. And then, I think the other thing I would say is our outlook for the balance of the year is also based on a -- U.S. dollar is weaker than the current level. So, to the extent that prices were to go up further, I think that, where the dollar is right now with at least offset any possible further increase on direct materials or otherwise. So, I think we're pretty comfortable on a mine cost basis that we're going to be at the low end of our guidance on a cost per tonne basis at both operations, taking into account current market pricing and the dollar.

On all-in sustaining costs, I'd say, similar. But there could be some upward pressure relative to our outlook, if copper pricings stays at current levels, precipitously fell like $1 change like in the last month or so. I think our last outlook was based on something like over $4. But then, same thing like a partial offset to that is the fact that the U.S. Dollar strengthened as well. So overall, probably mine cost, we would expect to stay somewhere in the lower half of our guidance. And on all-in sustaining costs, I think our expectation is taking all things into account that we should be somewhere in the middle of the range for all-in sustaining costs.

On treatment cost, I would say that one of the factors, I mean, obviously, it's mixed. But in our particular case, with the mine plant that we have, we are shipping and therefore have lower treatment charges when we shipped to China in Q1 and Q4. And we're sending material to Tsumeb in Q2 and Q3, and as a result, treatment charges will be higher for those two quarters. On freight, freight is up year-over-year for sure. I say, it was in line with what we forecast for transportation to China. We were kind of at around what we actually planned. But rates for shipping to Namibia were higher. So that would be -- and it's not huge, but yes, it was higher going to Namibia. So between the two, that's why Q2 and Q3 treatment charges would be elevated relative to Q1 and Q4.

[Raj Ray, BMO]

Okay. Thanks a lot for that. One last question if I may ask on. Maybe did mention, revised your guidance for the year, but we're looking at the second half of the year. Do you see any potential risks? Are you pretty confident to be back at steady state?

[David Rae, President and Chief Executive Officer]

So the tonnage is that we objecting for the balance of the year, our tonnage is that we've achieved in four consecutive quarters previously. So, it's reasonable to believe that with the completion of the shutdown, but more importantly the opportunity to correct a number of the water cooling issues, which are really can't get to while you're online. And we're confident that outlook is reasonable.

[Raj Ray, BMO]

Thank you very much. That's it from me.

[Operator]

Thank you. I would now like to turn the conference back over to Jennifer Cameron for any closing remarks.

[Jennifer Cameron, Director of Investor Relations]

Well, thank you everyone for joining us. If you have any further questions, please feel free to reach out and if not, we will talk to you next quarter. Thank you.

[Operator]

This concludes today's conference call. Thank you for your participation You may now disconnect. Everyone have a wonderful day.