Dundee Precious Metals Inc

TSX:DPM

Earnings Call Analysis

Record Financial Performance and Future Growth Initiatives

Dundee Precious Metals reported record results for Q2 2024, with revenue of $157 million, a stunning 18% increase from last year. Their adjusted net earnings soared to $71 million or $0.39 per share. The company generated $82 million in free cash flow, bolstering their cash balance to $707 million with no debt. Key operational successes include producing 68,000 ounces of gold and 8 million pounds of copper with an all-in sustaining cost of $710 per ounce, maintaining their 2024 guidance. Looking ahead, they’re advancing the Coka Rakita project, aiming for first production in 2028, supported by robust financial health and continued shareholder returns .

Strong Financial Performance in Q2 2024

Dundee Precious Metals (DPM) reported an exceptional second quarter in 2024, with substantial growth across key financial metrics. Revenue surged to $157 million, marking an 18% increase compared to the previous year. This increase was primarily driven by elevated metal prices, despite a planned decrease in gold volumes sold from the Ada Tepe mine. Adjusted net earnings reached a record $71 million, translating to $0.39 per share. Additionally, cash flow from operations climbed to $126 million, and free cash flow hit $82 million, underscoring the company's robust operational performance and favorable market conditions.

Operational Highlights and Production Guidance

DPM produced approximately 68,000 ounces of gold and 8 million pounds of copper in the second quarter. Chelopech mine outperformed expectations, yielding 44,000 ounces of gold at an all-in sustaining cost of $531 per ounce, while Ada Tepe produced 24,000 ounces at a cost of $699 per ounce. The company is on track to meet or exceed its 2024 production guidance, reflecting a strong operational track record and effective cost management strategies. This will mark DPM's tenth consecutive year of fulfilling or surpassing gold production and cost guidance.

Strategic Focus and Growth Pipeline

A pivotal element of DPM's strategy involves its growth pipeline. The completion of the Preliminary Economic Assessment (PEA) for the Coka Rakita project highlighted a high-margin, low-cost operation with an Internal Rate of Return (IRR) of 33% at a gold price of $1,700. The firm is advancing towards a Prefeasibility Study (PFS), expected to be completed by Q1 2025. This aggressive exploration approach, coupled with ongoing projects such as Loma Larga and the continuing exploration around Chelopech, positions DPM favorably for future production expansion.

Balance Sheet Strength and Return of Capital Plans

DPM maintains a solid balance sheet, ending the quarter with a cash balance of $707 million and no debt. The company emphasized its financial flexibility, allowing it to fund both growth opportunities and return capital to shareholders. In the first half of 2024, DPM utilized $18.4 million for share repurchases and paid $14.5 million in dividends, returning 23% of free cash flow to shareholders. This disciplined capital allocation underscores the company's commitment to enhancing shareholder value while pursuing strategic growth.

Update on Tsumeb Smelter Transaction

During the earnings call, DPM provided updates on the sale of the Tsumeb smelter. The original purchase price of $49 million is now expected to be reduced to $20 million following negotiations with Sinomine. Additionally, DPM is discussing an arrangement to temporarily serve as a tolling agent as they navigate the transition. This strategic divestment aligns with DPM's intent to concentrate on its core gold mining assets, thereby simplifying its portfolio.

Future Outlook: Cost Management and Industry Position

DPM reported all-in sustaining costs of $710 per ounce for the quarter, slightly lower than prior periods, reflecting better byproduct credits and effective cost control. The company anticipates sustaining capital expenses to pick up in the latter half of the year, typical for their production cycle. Additionally, the management anticipates that the recent decreases in treatment charges (TC/RCs) will result in a net benefit for Chelopech, indicative of DPM's strong competitive position in the industry. Overall, the firm appears well-positioned to continue delivering value to shareholders amid favorable mining conditions.

Earnings Call Transcript 2024-Q2

[Operator]

Good day, and thank you for standing by. Welcome to the Dundee Precious Metals Second Quarter 2024 Earnings Results Conference Call. [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, executive]

Thank you, and good morning. I'm Jennifer Cameron, Director, Investor Relations, and I'd like to welcome you to the Dundee Precious Metals Second Quarter Conference Call. Joining us today are members of our senior management team, including David Rae, President and CEO; and Navin 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 meaning under IFRS and may not be comparable to similar measures presented by other companies.

These definitions 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 reconciliation of these measures.

Please note that unless otherwise stated, operational and financial information communicated during this call are related to continuing operations and have been generally rounded, references to 2023 pertain to the comparable periods in 2023, and references to averages are based on midpoint of our outlook or guidance.

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

[David Rae, executive]

Thanks Jennifer. Good morning, and thank you all for joining us. I'm pleased to provide you with an overview of our second quarter results and to provide some insights into our achievements during this period. This morning, David and I will briefly review our results and discuss why we believe DPM continues to be well positioned to deliver value now and over the long term.

As you would have seen from our news release circulated last night, we've delivered a very strong quarter, which included record financial results and excellent cost performance. Highlights from our second quarter include: production of approximately 68,000 ounces of gold and 8 million pounds of copper, an all-in sustaining cost of $710 an ounce, in line with our guidance for the year, record free cash flow generation of $82 million and continued financial strength as we ended the quarter with a consolidated cash balance of $707 million and no debt. I'm pleased to say that we're on track to achieve our 2024 guidance targets, which will mark the 10th consecutive year we have achieved or outperformed our gold production and all-in sustaining cost guidance, a testament to the strength of our operating team and the quality of our minds.

During the quarter, we also advanced our growth pipeline, completing the PEA for Coka Rakita and initiated the pre-feasibility study, which is on track for completion in the first quarter of 2025. Taking a look at our operations in more detail, Chelopech continued its consistent track record in the second quarter, producing 44,000 ounces of gold and 8 million pounds of copper. That's an impressive all-in sustaining cost of $531 per gold ounce sold. Of the balance of the year, we expect improved copper grades at Chelopech, and the operation is on track to achieve its production guidance for the year.

With all-in sustaining costs of $670 per ounce in the first half, Chelopech is also expected to be well within its cost guidance for the year. We continue to focus on extending Chelopech's mine life through our successful in-mine exploration program and an aggressive brownfield exploration program. With increase in mine and brownfield exploration drilling, we believe there's strong potential to continue our track record of extending mine life at Chelopech, which currently extends to 2032.

We commenced in the quarter drilling at Sharlo Dere during -- end of evaluating extensions and confirming several high-grade intercepts from previous work. We also continue to advance the activities to support moving to the commercial discovery phase for Brevene and this includes a 1-year extension of the exploration rights, which we expect to receive in the fourth quarter.

Ada Tepe produced approximately 24,000 ounces of gold in the second quarter, in line with our expectations. All-in sustaining cost was $699 per ounce of gold sold, which is below the low end of Ada Tepe's 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.

We're also continuing our exploration efforts around Ada Tepe with activities focused on delineation of Krumovitza. A drilling, which commenced at the end of March is ongoing and permitting for the next phase of drill sites is in progress.

Turning to our development projects and starting with our high-quality Coka Rakita project. We completed and showed the results of the PEA in the second quarter, which outlined a high-margin, low-cost underground mine, robust economics with first production targeted for 2028. Based on the positive results, we initiated a PFS, which is advancing well and is on track for completion in the first quarter of 2025. We're also advancing project permitting activities in support of this timeline with good support and engagement from key regional and national authorities. This includes preparation for the EIA, which we expect to submit in the first quarter of 2026.

What makes Coka Rakita particularly exciting is that it's not only an attractive project on a stand-alone basis with an IRR of 33% at a $1,700 gold price, but it also has significant exploration potential across our 4 licenses. We are continuing our scalp drilling program, which is focused on aggressively pursuing additional targets and following up on the positive results we published earlier in the year. Overall, we're very excited by Coka Rakita's potential in a region where we've had a presence for many years and where we've developed strong relationships with local stakeholders.

Turning to the Loma Larga project. We continue to progress activities related to permitting and stakeholder relations. The informational phase of the environmental consultation process was successfully completed in April, and we are working with the Ministry of Energy and Mines to outline an interim procedure for the free prior and informed consultation process. The baseline ecosystem and water studies are also currently in progress. And we 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 our other capital allocation priorities.

In our release last night, we provided an update on the Tsumeb sale. As we progress towards closing, all Chinese regulatory approvals have now been received with the Namibian Competition Act being the only remaining approval required. Due to DPM's sale of the smelter, the smelters tolling agent has elected to end the existing agreement it had with Tsumeb. And DPM will therefore be required to purchase all unprocessed concentrates and secondary materials owed by Tsumeb, which amounts to approximately $80 million net of the cash settlement of the outstanding metal recoverable. As a result of this development, we are in discussions with Sinomine regarding amendments to the agreement, including an expected reduction in the cash consideration for the smelter from $49 million to $20 million.

We're also discussing an arrangement whereby the DPM would stand to the position of a tolling agent on a temporary basis commencing when the current agreement with IXM ends and terminating 4 months following closing. We view this as a necessary step to facilitate the transaction, one that we are comfortable in making given DPM's experience and knowledge of smelter counterparties. The sale of the smelter is consistent with our strategic objective of focusing on our gold mining assets and simplifying our portfolio going forward, and we continue to target closing the transaction in the third quarter. Overall, we delivered record financial results for the second quarter and first half of the year. And with both mines on track to achieve our 2024 guidance. We are well positioned to continue our strong operating track record.

I'll now turn the call over to Navin for a review of our financial results.

[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.

Looking at our financial results, second quarter highlights include revenue of $157 million, record adjusted net earnings of $71 million or $0.39 per share, cash flow from operating activities of $126 million and record free cash flow of $82 million. Overall, results during the quarter reflect our strong operating performance, the low-cost nature of our operations and a favorable commodity price environment.

Looking at our earnings and cash flow in more detail. Revenue of $157 million in the second quarter was 18% higher than 2023 due primarily to higher realized prices of metals sold, partially offset by lower volumes of gold sold at Ada Tepe as planned. Adjusted net earnings in the second quarter of $71 million or $0.39 per share increased compared to the prior year due primarily to higher revenue and higher interest income, partially offset by higher planned exploration and evaluation expenses from Coka Rakita and higher income tax.

Cash flow from operating activities of $126 million for the quarter was higher than the prior year due primarily to higher earnings generated in the quarter as well as the timing of deliveries and the collection of outstanding receivables. Free cash flow in the quarter was $82 million, an increase of $16 million compared to 2023 due primarily to higher earnings generated in the quarter and lower cash outlays for sustaining capital expenditures.

Taking a look at our cost metrics for the quarter. All-in sustaining cost of $710 per ounce of gold sold was slightly lower than the prior year due primarily to higher byproduct credits, lower treatment charges and lower cash outlays for sustaining capital, partially offset by lower gold sold and higher costs related to share-based compensation, labor and freight. In terms of our capital spending, sustaining capital expenditures were $8 million for the quarter compared to $6 million in 2023 due primarily to the timing of expenditures. Gross capital expenditures of $4 million for the quarter were lower compared to 2023 due primarily to lower expenditures related to the Loma Larga Gold project as expected.

As Dave mentioned, the strong results in the first half of the year, we are on track to achieve our annual guidance metrics for the year. We continue to maintain a strong balance sheet and cash position with a consolidated cash balance of $707 million, which includes the cash held at Tsumeb, no debt and a $150 million undrawn revolving credit facility. Given the strength of our balance sheet and our outlook for continued strong free cash flow generation, we are in a unique position with the financial flexibility to fund growth opportunities while continuing to return a portion of our free cash flow to our shareholders, in line with our commitment to capital discipline.

During the first half of 2024, the company repurchased 2.3 million shares at a total cost of $18.4 million under the share buyback program and paid $14.5 million of dividends, representing an aggregate return of 23% of our free cash flow to shareholders.

With that, I will turn the call back to Dave for his concluding remarks.

[David Rae, executive]

Thanks, Navin. In closing, we believe that our strong Q2 results demonstrate that DPM is in a unique position in the industry, considering our strong operating track record, our all-in sustaining costs, which are among the lowest in the gold industry, our significant free cash flow generation, attractive organic projects and the financial strength and flexibility to internally fund our growth pipeline while continuing to return capital to shareholders.

And with that, I'd like now to open the call to any questions.

[Operator]

[Operator Instructions]. And our first question comes from Wayne Lam with RBC.

[Wayne Lam, analyst]

I guess just at Tsumeb, I just wanted to understand a little bit better on sale and the reduction in the purchase price. Is the $29 million in cash reduction mostly driven by Sinomine having to go out and find a new tolling agent. Just curious why such a large concession of the overall price had to be made? And then in the event that they cannot find someone to assume that role, is there a scenario where DPM would have to take that on for an extended period? Or could there be a further amendment to the currently proposed terms?

[David Rae, executive]

Yes, Wayne. So first of all, there were 2 different elements to the change in valuation. The trigger was the position with the tolling agent. And of course, at that point, we reviewed the current situation in terms of the market. So those were the sort of 2 elements. And coming to your second point about finding somewhat, we don't think it's an issue with the ability to find someone in the market in order to perform that function, but this does create opportunity for Sinomine in terms of how they might do that. And do we see that we might extend? Do we see further amendments at this point? No. It's pretty clear that, that's 4 months.

[Wayne Lam, analyst]

Okay. Great. And then do you foresee any credit risk on the $80 million that you guys are effectively lending. Just wondering if this could be perhaps interpreted lending $80 million to help close a $20 million sale, which seems like quite a bit of risk.

[Navindra Dyal, executive]

Wayne, it's Navin. No, we're actually not lending the funds. We're buying the concentrate ourselves. So it's essentially a working capital facility. It's no different than what IXM had been providing to us over the many years. So we were just stepping into a IXM's position as essentially the finance year for this inventory. And under IXM's purview as being the tolling agent, they own the material as we step into it as DPM, we will own the material.

[Wayne Lam, analyst]

Okay. Understood. And then just lastly at Ada Tepe with the $5 million to $70 million exploration spend guidance this year. You guys have been pretty upfront about the mine life being depleted at mid '26. As you look out to next year, is the plan to continue to spend on drilling there to try to extend out a few more quarters beyond that? Or just wondering if there becomes a point where you don't feel the return there justifies the capital outlay?

[David Rae, executive]

I think the simple answer to that is that we've identified a very exciting prospect, which has demonstrated some incredible value for the company. As long as we feel that there are opportunities in exploration in and around that area, we will continue.

[Wayne Lam, analyst]

Okay. Good to hear. There's still some prospectivity.

[Operator]

Our next question comes from Eric Winmill with Scotiabank.

[Eric Winmill, analyst]

Read really nice to see the cash build here in Q2. Maybe just continuing on the questions about Tsumeb. If you're acting as a tolling agent, do you see a situation where maybe you end up sending more Chelopech or Tsumeb for processing in the future?

[David Rae, executive]

Definitely not.

[Eric Winmill, analyst]

Okay. That's helpful. And so obviously, TC/RC is coming down this quarter. Do you sort of see that as a sustainable level going forward? Or any thoughts here on TC/RCs throughout the balance of this year?

[Navindra Dyal, executive]

Yes. I can answer that. Yes, so we have seen definitely a decrease in the TC/RC that's been beneficial for Chelopech certainly and not so much for the smelter. It appears as if based on what we're seeing that we might be coming off the bottom, but it probably still will take some time for that to come back to normal levels, at least for the smelter, but we are enjoying it in terms of reduced TCs and also better payable terms is actually mostly for Chelopech.

[Eric Winmill, analyst]

Okay. That's helpful. Just turning to Tierras Coloradas, I think you had some pretty good results there. I know you drilled almost 12,000 meters in Q2. I assume we'll see those results soon and now applying for advanced exploration permits, what does that involve here? I mean -- and should we read through positively here that you like what you're seeing and that's why you want to move to advanced exploration?

[David Rae, executive]

So we do like what we're seeing at Tierras Coloradas. You're correct in saying that we've completed an amount of work and we're currently waiting to see the outcome from that. But our view on Tierras Coloradas is more than just the area that we've looked at. There remains opportunity there beyond what we currently targeted, which was the veins. There's also what we suspect is a porphyry there plus some high sulphidation epithermal potential. So what we're also doing at the same time is we're looking at other targeting opportunities and doing some surface work, the leg work basically to prepare for future targeting.

In terms of the exploration permitting, that's not preventing us from drilling. That's just something that we are going through at the moment with the intent of changing to a different phase of the exploration process.

[Eric Winmill, analyst]

Okay. Great. And maybe if you can delve me one more question. Just on sustaining CapEx, looks like maybe you're running a little bit low relative to the full year guidance. So should we expect that sustaining CapEx is going to pick up in the back half of the year?

[Navindra Dyal, executive]

Yes. Eric, that's probably a good assumption of picking up in the back half. It's typically back-end weighted or sustaining capital spend. So yes.

[Operator]

[Operator Instructions]

Our next question comes from Frederic Bolton with BMO Capital Markets.

[Frederic Bolton, analyst]

So I just have a couple of questions -- because they haven't been asked and answered. So given the strong free cash flow and low cost at Chelopech, do you have any thoughts on increasing shareholder returns.

[Navindra Dyal, executive]

Sure, I'll take that. Frederic, we typically revisit this topic quite regularly as the management team and the Board. We're focused on taking a balanced approach to capital allocation, which focuses on our balance sheet strength, capital return to shareholders and reinvestment. Just a reminder, one of the very few producers of our size that pay a dividend, and we continue to use our NCIB as a tool for the capital allocation program. And we also view our cash balance as a strategic advantage.

So we want to make sure that we maintain our financial strength to fund our growth pipeline as well as continuing to pay a sustainable dividend as well as pursue other opportunities.

[Frederic Bolton, analyst]

Okay. And -- so I noticed that you'll be deferring the initial source at Sharlo Dere -- Chelopech, how should we interpret this? Is this a case of the geology being more complicated than expected? Or can you give us a bit more color on that, please?

[David Rae, executive]

Really just a question of prioritization and looking at whether we drill from surface or underground. So we've moved to having more drills access the strong underground. So you've got to get in the position to make that happen you've got to get the bigger drill rigs to make that happen and so on. So if anything, we're still excited about what's happening in Sharlo Dere we want to do that work, we're just reconfiguring the way we're going to approach it. So we'll have 2 drills from underground, 2 drills from the surface. Just the timing at which that starting is not going to allow us to bring that into the next update of the reserves and resources.

[Frederic Bolton, analyst]

Okay. Great. Sorry, I just have 1 last question, just a follow-up on the previous caller. Can you -- with regards to the TC/RC charges for the rest of the year, I know you mentioned you're happy but -- at these levels. Can you just give us a little bit of guidance how we should look at it for the rest of the year, can we sort of continue to model at these levels?

[Navindra Dyal, executive]

Yes, Frederic, it's a bit challenging because there are -- TCs and RCs are one component of the way we kind of sell our concentrate. The other component, obviously, is the factor, the payable metal factor that gets applied. What we are seeing, I guess, in terms of guidance, what we're seeing relative to our budget for the year, we're seeing about a $4 million to $5 million benefit on the whole, taking into account higher payable terms and perhaps flat to lower TC/RC that's hitting the bottom line essentially. But it's hard to give a specific guidance on what the TC rates would be for the balance of the year. It's actually a combination of TCs and better payable terms.

[Operator]

Thank you. I'm showing no further questions at this time. I would now like to turn it back to Jennifer Cameron, for closing remarks.

[Jennifer Cameron, executive]

Thank you all for joining us today. If you have any further questions, please feel free to reach out. And for those of you in Ontario, please enjoy the long weekend. Thank you.

[Operator]

This concludes today's conference call. Thank you for participating. You may now disconnect.