Dundee Precious Metals Inc

TSX:DPM

Earnings Call Transcript 2017-Q4

[Operator]

Good day, ladies and gentlemen, and welcome to the Dundee Precious Metals Fourth Quarter and Full Year 2017 Analyst Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Ms. Janet Reid, Manager of Investor Relations. Ms. Reid, you may begin.

[Janet Reid]

Good morning, everyone, and welcome to Dundee Precious Metals Fourth Quarter and Full Year 2017 Results Call. With me today are Rick Howes, President and CEO; and Hume Kyle, Chief Financial Officer, who will each comment on the quarter; as well as David Ray, Chief Operating Officer; Nikolay Hristov, Senior Vice President, Sustainable Development; and John Lindsay, Senior Vice President of Projects, who are here today to assist with answering questions following our formal remarks. After close of business yesterday, we released our fourth quarter and annual results and hope you 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. 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 relates to continuing operations in U.S. dollars, which has generally been rounded, and any references to 2016 or prior period pertain to the comparable periods in 2016. On this morning's call, Rick will comment on our fourth quarter and annual operating results as well as the progress being made on our capital projects and exploration programs for the quarter. Hume will then provide an overview of our fourth quarter and annual financial results and our guidance for 2018. With that, I'll turn the call over to Rick Howes.

[Richard Allan Howes, President, Chief Executive Officer & Director]

Thanks, Janet, and hello, everyone. And thanks for joining us today for our fourth quarter 2017 conference call. I'm pleased to provide you with an update on our fourth quarter and 2017 annual results, outlook for 2018 and progress on our key projects and initiatives. As the global economy continued its gradual recovery from the financial crisis, commodities are benefiting. The gold price moved above USD 1,300 in December and was up 13.5% in 2017, and sits above $1,350 today. Prospect for gold remains strong with the U.S. dollar weakening, slowing global supply growth and strong demand growth trajectories in both India and China, the largest consumers of gold. Despite the continued rise in interest rates as the Fed continues its policy of monetary tightening, gold still built momentum. And with soring equity values and low interest rate environment, gold is a store of wealth, offers investors a good alternative and hedge against potential rising inflation and geopolitical uncertainty. Copper was one of the best-performing base metals in 2017, rising 31% to back over $3 a pound, with only cobalt outperforming it, albeit by a long shot, which rose about 130%. The copper market remains relatively in balance but is expected to go into deficit after 2019, with very few large projects slated to come onstream and increasing demand for electric vehicles and general global growth. In the near term, copper prices are expected to remain relatively flat but could be sensitive to any major supply disruptions, such as strikes. Global base metal equities significantly outperformed global gold equities in 2017, rising almost 28% compared to gold equities, which remained relatively unchanged over 2017. Our share price moved up 33% in 2017 as we advanced our low-cost organic gold growth project at Krumovgrad, which we expect to reach production stage in the fourth quarter of this year. With a strong fourth quarter performance both from Chelopech and Tsumeb operations resulting in annual adjusted earnings per share of $0.09. We achieved record annual gold production of 197,000 ounces, which exceeded even our updated guidance. Our annual copper production of 35.8 million pounds was the same guidance, and the all-in sustaining cost per ounce of gold for the full year was $729, well below our original guidance range. At our Tsumeb smelter, we smelted 219,252 tonnes of conflict concentrate in 2017, which is a 9.5% increase over 2016 and well within our guidance. Our Krumovgrad Project remains on track with work concentrated in Q4 this year. Sustaining capital expenditures will be below 2017 guidance, primarily due to delays in the execution of certain projects and cancellation of projects no longer necessary as a result of process improvements at Tsumeb. Growth capital expenditures were also below 2017 guidance due to the timing of certain expenditures related to the Krumovgrad Gold Project and a reduction in estimated capital cost. As of December 31, 2017, approximately 79 million has been incurred on the Krumovgrad Project, with an additional $83 million to $89 million forecasted in 2018. The aggregate cost of the project was expected to be between $160 million to $168 million compared to the original estimate of $178 million. With Krumovgrad Project construction now over halfway complete, our balance sheet remains strong, with $28 million in cash, $250 million in undrawn revolving credit facilities as well as investments of fair value of $48 million. We continue to execute strategies to create value by optimizing operating performance, advancing our organic growth projects and building a pipeline of future growth opportunities, while we maintain our balance sheet strength. For 2018 the company's total growth capital expenditures are expected to range between $90 million to $100 million, which primarily relates to the completion of the Krumovgrad Gold Project. The balance of $9 million to $11 million of additional growth capital includes $2 million of resource development drilling at Chelopech as well as $7 million to $9 million of margin improvement projects at Chelopech and Tsumeb. Sustaining capital expenditures are expected to be between $29 million and $39 million. The exploration budget for 2018 has been increased to $14 million from $9 million in 2017. The increased budget will fund drilling programs at Chelopech, Krumovgrad, Timok Gold Project in Serbia and our Malartic project in Québec. The smelter performance in Q4 continued the trend of more reliable and consistent operating performance. We smelted 59,000 tonnes of complex copper concentrate with a cash cost of $406 a tonne. For the full year, we smelted 219,000 tonnes, which was a 9.5% improvement over 2016. This performance generated $14 million in EBITDA and with capital spend of only $8.6 million, resulted in an annual positive cash flow from the business for the first time. One key factor that helped get this improved performance was the better damage control in the Ausmelt furnace, which helped to extend the life of the furnace mining to more than 12 months. The addition of the matte holding furnace in June 2017 also allowed for significant higher throughput of the hot metal section during single converter operations, which occurs above 30% of the time. The floor reliability of the high-pressure oxygen plant was the biggest factor hampering the smelter performance throughout 2017. Improved monitoring and data analytics, along with more proactive and predictive maintenance is being put in place, so we expect this will improve in 2018. Significant progress is made in 2017 on reducing the secondary copper inventories that accumulated during the construction and commissioning of the acid plant and copper converters. This reduction will continue through 2018 as we expect to be back to normal levels in 2019. This will result in reductions in metal exposures, stockpile interest and allow higher throughput capacity for fresh concentrates. Throughput for 2018 is expected to range between 220,000 and 250,000 tonnes as we continue to optimize the performance of this newly upgraded and new reconnected facility. Volumes of complex concentrate smelted in the first half of 2018 are expected to be lower than the second half due to the timing of the annual maintenance shutdown, which is currently expected to take place in the first half of 2018. A number of improvement projects are planned for 2018 to improve smelter throughput and reduce cost. The most significant ones are the feed and planning materials handling project, the maintenance transformation project and the operating practices and controls project. We're targeting to increase throughput by 10% and reduce cost by 7% in 2018. We continue to advance the smelter expansion project to increase the throughput of complex concentrate to as much as 370,000 tonnes per annum. The feasibility study was completed in the fourth quarter of 2016 and confirmed the robust project economics with an estimated implementation capital costs of approximately $52 million. Scope of the project includes the rotary holding furnace, additional cooling and other upgrades to the Ausmelt furnace as well as upgrades to the slag mill area. Work is progressing on securing the necessary permits to support this planned increase. Early discussions are underway to securing sufficient complex concentrate feeds to fill the expanding capacity, but the project will not proceed until acceptable commercial arrangements are reached, which is not likely to occur until at least 2019. The Chelopech had record gold production in 2017 of 197,000 ounces at an all-in sustaining cost of $729 an ounce, which even exceeded our revised guidance. This was primarily a result of the positive gold grade reconciliation from a 103 stoping blocking and higher gold and copper recoveries from the mill optimization work. Gold grades were 9% higher and copper grades were 7% lower than 2016. Cash costs per tonne of ore processed in Q4 full year 2017 were higher than 2016, primarily due to the stronger euro. Gold-containing concentrate produced is expected to be between 165,000 and 195,000 ounces and copper between 33 million and 40 million pounds in 2018. We expect gold grades to return closer to reserve average grades in 2018 and copper grades to be similar to 2017 copper grades. Gold production in the first half of 2018 is expected to be higher than the second half based on the planned sequencing. We have several projects to further increase stope intensity and cycle time and to optimize production and cost. In addition, we'll be introducing rapid mine planning and dynamic scheduling using the MineRP software as part of a broader initiative to implement both a fully integrated dynamic business planning and execution model. We will also continue our process plan optimization work designed to improve processes, reduce consumables, consumption and improve metal recoveries. In our original exploration program around Chelopech in 2018, we began a 15,000-meter program designed to system -- we will begin a 15,000-meter program designed to systematically drill test the 1.6 kilometers straight line target known as the Southeast Breccia Pipe Zone as well as several other targets identified through geophysics and geochemistry works completed in 2017. Early drilling has already identified several narrow zones of copper, gold mineralization at several of these targets. 41,000 meters of resource definition drilling was completed in 2017 on a number of existing and new ore bodies, including the new rediscovered 153 ore body. Updated resources and reserves will be globally released with the annual information form in March. At Krumovgrad, at the end of December, construction of the project was approximately 51% complete. Based on installed quantities, the project remains on track for first concentrate production in the fourth quarter of '18. The estimated cost for the project at completion is currently expected to be $162 million and -- between $162 million and $168 million, of which $78.5 million hasn't been incurred today. The decrease relative to the 2015 estimate of $178 million was primarily due to a reforecast of the contingency, more favorable exchange rate than budgeted and a reduction in earthwork quantities. Key milestones at the Krumovgrad Project in 2018 include the completion of the integrated mine waste facility earthworks, mechanical, structural, electrical and instrumentation installation and pre-stripping of the mine. Cold and hot commissioning are on track for the second and third quarters, respectively, followed by first concentrate production in commencement of the ramp-up to full design capacity in the fourth quarter. The operating team is focused on operational readiness and deploying shared service model to maximize the synergies, which help us. Fourth quarter gold production of approximately 3,000 ounces is expected to curve prior declaring commercial production as a result -- and as a result is excluded from the above 2018 guidance. Exploration has identified a number of satellite deposits within a few kilometers of Krumovgrad during 2017. A total of 3,600 meters of diamond drilling, 14 holes was completed. Drilling focused on the Kupel North target area. A geological discovery at Kupel North was approved by the Minister of Energy in April 2017. Drilling in the Surnak satellite will begin in Q1 of this year followed by drilling on the Kuklitsa satellite and several other targets identified by ground, magnetics and geochemistry. At our Timok Gold Project in Serbia, following the discovery of the Korkan West deposit in 2017, we will continue to advance exploration of this area in 2018, with the goal of adding more ounces to the existing Timok Gold resource. During 2017, a total of 9,300 meters of diamond drilling was completed, including 2 phases of drilling at the Korkan West, which is all gold mineralization being found over a strike length of 220 meters along the north, northwest structurally controlled zone. All drilling intervals in this zone are fully oxidized. An additional 8,000 meters of drilling is planned in 2018 on Korkan West and several other advanced targets. We're currently conducting leachability tests for the oxidized materials to determine viability for heap leaching. If successful, this will lead to an updated mineral resource estimate and an internal scoping study later in 2018. At our Malartic joint venture within -- in Québec, activities commenced during the third quarter of 2017 following the option agreement signing in June 2017. During the fourth quarter of 2017, detailed geophysical and geochemical surveys as well as geological mapping and drill core logging were focused to the respective -- prospective areas located within the volcanic sedimentary Blake River Group, where targets are represented by a volcanogenic massive sulfide, intrusion-related and shear zone-hosted gold mineralization. Results from high-resolution drone-based unmanned area vehicle magnetics followed -- covering 12 square kilometers and pole-dipole IP survey and new multielement geochemical data are currently being processed and integrated with historical expression database, and a new 3D geological model is being generated. Initial drill hole starts are being targeted to begin drilling in the first quarter of 2018. So in summary, for 2018, our focus will be on increasing the profitability of the business and successfully executing our organic growth projects. Specifically, the successful construction completion, commissioning and ramp-up of the long-anticipated, high-grade, low-cost Krumovgrad open pit gold project in Bulgaria, which will generate significant growth in gold production and cash flow starting in 2019. We continued optimization of the Tsumeb smelter performance, so that we reach target smelting rates and cost and continue pursuing growth opportunities within our existing portfolio of assets through brownfield exploration programs in Bulgaria, new Chelopech and Krumovgrad, and in Serbia at our Timok Gold Project as well as through discipline investments and new development of opportunities. Thank you. I will now turn the call over to Hume, who will review the financial results and 2016 guidance, following which we will open the floor to questions.

[Hume D. Kyle, Executive VP & CFO]

Thanks, Rick. Good morning, everybody. On the back of the improved operating results that Rick commented on. Overall, we reported significantly stronger financial results in 2017, with reported adjusted net earnings of $0.09 per share compared to an adjusted loss of $0.15 in 2016 and adjusted EBITDA of $92 million compared to $73 million in 2016. These increases were primarily due to higher volumes and realized pricing on payable metals and higher smelter throughput and pulls, partially offset by higher treatment charges at Chelopech and higher operating cost at Tsumeb. For the fourth quarter, we reported adjusted net earnings of $0.02 per share compared with $0.04 in 2016 and adjusted EBITDA of $22 million compared to $30 million in 2016. These decreases were driven primarily by higher treatment charges, reflecting increased deliveries to Tsumeb and favorable adjustments on provisionally invoiced sales in the fourth quarter of 2016, the effect of which more than offset higher volumes and realized pricing in payable metals. Fourth quarter and annual 2017 adjusted earnings were also impacted by lower depreciation at Tsumeb as a result of changes made to the estimated useful life of certain assets and impairment charges taken at Tsumeb in 2016 as well as the copper hedging we did in conjunction with de-risking moving forward with our Krumovgrad project that resulted in us not fully realizing the upward move in copper pricing during 2017. From a cash flow perspective, funds from operations during the quarter and 12 months of 2017 were $20 million and $90 million, respectively, compared to $25 million and $122 million during the comparable periods in 2016. Free cash flow, which we define as funds from continuing operations, less cash outlays for sustaining capital and mandatory debt service obligations, was $15 million and $46 million in the fourth quarter and 12 months of 2017 compared with $11 million and 17 -- $75 million during the comparable periods in 2016. These year-over-year cash flow decreases can be attributed entirely to the receipt of $50 million from the prepaid forward gold sale we completed in 2016 as both Chelopech and Tsumeb reported increased operating and financial results during the period. Turning to our cash -- our cash cost measures. Fourth quarter and annual 2017 cash cost per tonne of ore processed was $37 and $34, respectively, up 13% and 4% from 2016, primarily reflecting the U.S. weaker dollar and higher royalties as a result of increased production and higher metal prices. Fourth quarter all-in sustaining cost of $802, up from $190 in 2016, was impacted by the higher treatment charges related to increased deliveries to Tsumeb and favorable adjustments on provisionally invoiced sales in Q4 2016, which more than offset higher gold sales and by-product credits. All-in sustaining cost in 2017 was $729, down $18 from 2016, due primarily to higher gold sales, which more than offset higher treatment charges due principally to increased deliveries at Tsumeb. At Tsumeb, cash cost per tonne in the fourth quarter was $406, up $37 from 2016, due to lower volumes of complex concentrate smelted and higher electricity, contractor and labor rates. For the year, cash cost was $458, up $18 from 2016, due to higher electricity contractor and labor rates and partially offset by higher volumes of concentrate smelted. Total sustaining and growth capital expenditures for the fourth quarter of 2017 were $5 million and $24 million for an aggregate of $29 million, up from $14 million in the corresponding period of 2016. 2017 sustaining and growth capital expenditures were $21 million and $75 million for an aggregate spend of $96 million, up from $51 million in 2016. These increases related to the Krumovgrad Gold Project where we've incurred approximately $79 million to date, including $9 million from Q4 2016. All major construction contracts have now been awarded, and rates are locked in for the balance of the project. During the quarter, no additional hedging was undertaken beyond the regular QP hedging we do, which locks in the pricing associated with all reported revenue. As a result, our 2018 hedge positions are as follows: 93% of our expected 28 payable copper production has been hedged; 56% was hedged at $262 as part of our hedging to de-risk the Krumovgrad Project; and 37% was hedged using options, providing a minimum price of $288 per pound and a maximum price of $332 per pound. 28% of our Namibian operating costs were hedged at $13.59, and substantially, all of our euro capital expenditures in respect to the Krumovgrad project were hedged in an all-in weighted average rate of 1.12. Coming into 2018. We're in great financial shape. We have $281 million of cash resources, including $252 million under our long-term credit facility and $29 million of cash as well as a 10% interest in Sabina valued at approximately $48 million. And as a result, we are well-positioned to complete our Krumovgrad Project and advance our other growth capital initiatives. Looking forward, we're focused on a number of initiatives at Chelopech, Krumovgrad and Tsumeb that will further increase the expected profitability of each of these assets, completing the Krumovgrad Project on time, on budget, and achieving the first-world production in the first quarter as well as pursuing growth opportunities within our existing portfolio of assets through brownfield exploration programs and disciplined investments in new development opportunities. These are all laid out in the material we released yesterday, including our 2018 operational and cost guidance, which I'll summarize. At Chelopech, mine production is expected to be between 2.1 million tonnes and 2.2 million tonnes, and this range is similar to 2017 and reflects the annual production being limited to 2.2 million tonnes, pending an increase at mineral reserves. Gold production is expected to be between 165,000 ounces and 195,000 ounces, below our record production in 2017 of 198,000 ounces, which benefited from higher-than-anticipated grades, while in 2018, we're expecting grades to return to life-of-mine levels. Copper production is expected to be between 34 million and 40 million pounds compared to 36 million pounds in 2017. And as a result, our payable gold is expected to be between 140,000 and 170,000 ounces compared to 172,000 ounces in 2017. And payable copper sold is expected to be between 31 million and 37 million pounds compared with 34 million pounds in 2017. As Rick noted, we expect Krumovgrad to produce 3,000 ounces of gold in the fourth quarter, and this has been excluded from our guidance as it's expected to occur prior to declaring commercial production. At Tsumeb, throughput is expected to be 220 million to 250,000 tonnes, up as much as 14% over 2017, and it continues -- as it continues to operate -- optimize and ramp up the facility to the nameplate capacity. And we'll continue to focus on increasing the availability of the oxygen and power plant and continuing to decrease secondary levels. From a cost perspective, cash costs are generally expected to be in line with 2017 levels, although they are being impacted by the current weak U.S. dollar environment. In particular, cash cost per tonne of ore processed is expected to be between $37 and $40, up from $34 in 2017. All-in sustaining cost per ounce of gold is expected to be between $640 and $855 compared to $729 in 2017, and cash cost per tonne of complex concentrate smelted is expected to be between $440 and $500 compared to $458 in 2017. On a capital front, sustaining capital expenditures for 2018 are expected to be between $29 and $39, and this is up from $21 million in 2017. This increase is the result of higher level of activity at Tsumeb due to several projects being shifted from 2017 to 2018 and approximately 9 million at Chelopech to raise the elevation of its tailings management facility, which is expected to be completed in 2019 at a total cost of $12 million. Gross capital expenditures for '18 are expected to be between $92 million and $100 million, up from the $75 million we spent in 2017, primarily relating to the capital associated with completing the Krumovgrad Gold Project. The balance of between $9 million and $11 million includes $2 million of resource development at Chelopech as well as $7 million to $9 million of margin improvement capital at Chelopech and Tsumeb. Exploration expenditures for '18 are expected to be between $10 million and $15 million, up from $9 million in 2017, and are being directed towards increased drilling activity at Chelopech, Krumovgrad and the Timok Gold Project in Serbia as well as greenfield projects in Bulgaria, Serbia and the Malartic project in Québec. In closing, we anticipate exiting 2018 with a strong balance sheet. And with the Krumovgrad construction project completed, expect to see a significant increase in reported production and free cash flow generating commencing in 2019. With that, I'll turn the call back over to the operator.

[Operator]

[Operator Instructions] And our first question comes from Trevor Turnbull with Scotia back.

[Trevor Turnbull, Analyst]

I just had a question a little bit about the guidance at Tsumeb. You're talking about, I think, 220,000 to 250,000 tonnes going through the smelter. And kind of looking back at previous presentations, you had that a little bit higher more like 240,000 to 265,000 tonnes for 2018 at least. Is that a function of the oxygen plant availability kind of coming back up to speed in 2018?

[Richard Allan Howes, President, Chief Executive Officer & Director]

I'll let Dave handle that one. He's a little closer to that.

[David Rae, Executive VP & COO]

Yes. I think what's been happening is that we've seen steady and sustained improvement in performance, and that's reflected in the numbers for last year, despite the fact we had the oxygen plant issues, which are a very large part of our expanding capacity as you may recall from some of the implement tests in 2014. So what we're doing is we're looking at the oxygen plant improved availability, so we're certainly seeing that back to where it was 2 years ago. And we're expecting to continue with this other performance improvement stability for various reasons, and I don't want to go into it unless you specifically want to have details on it. So we think at 250,000, it's definitely on if all those things come together. We're expecting 265,000 to be a final optimization. That's why we're not expecting we get that this year. We still think we need a number of things to come together to get to that point. What we see at the smelter at the moment is the steady improvement and performance maintenance activity, obviously funds activity, general stability throughout the process. And then just -- so the general efficiency in terms of rework, what we put in comes after those time of recirculation. So if these come in, so you will see the capacity increase up to that 265,000 point.

[Trevor Turnbull, Analyst]

And I would assume that in terms of adding capacity, you would like to see a kind of all these optimizations betted down before you really pursue adding capacity? Or is that not correct?

[David Rae, Executive VP & COO]

You would be quite right. So what we're trying to do is, we've actually just implemented a number of processes, which really target stability and then moving what is the production based on having all of these things aligned through the process. And only after that then we look at putting in additional capital to raise the tonnage. So you're quite right. We want to see those things betted down first before we start to put money in. So it's a good point. If you recall, you were saying that in our 2017, there were some deferred capital, that's because we no longer needed that capital at that point. Because the optimizations that we've made in places like the slag mill were already coming through. Similarly, the furnace, instead of running for 5 to 6 months, it was actually now running more than 12 months. So that's a 33% increase on the previous best concentrates reading that we've seen through this vessels. So that then deferred the water cooling. So quite right, capital will only come once we've seen these improvement initiatives betted down.

[Trevor Turnbull, Analyst]

And I probably asked you this before and maybe this is a question for Rick, but with higher copper prices and potentially a higher copper outlook, does this mean you're seeing more demand for the Tsumeb services?

[Richard Allan Howes, President, Chief Executive Officer & Director]

Well, certainly, higher copper prices for sort of new projects is probably the best influence on those projects that are waiting to come onstream that may be complex in nature. There's a bit of material, so definitely the positive effect on new supply. But we don't anticipate any of those sort of major complex projects to come onstream before 2021. So that will be the biggest influence.

[Trevor Turnbull, Analyst]

Okay, great. And then I just had a kind of a housekeeping question for Hume on the financials. With respect to Q4 specifically, can you just break out what G&A was in Q4 for us, Hume? I'm kind of having trouble backing into it with the stock-based compensation and everything.

[Hume D. Kyle, Executive VP & CFO]

Just trying to remember, do we know what the -- can you just remind me what the mark-to-market was for Q4?

[Janet Reid]

$2 million. [ 1% ]

[Hume D. Kyle, Executive VP & CFO]

Yes. So G&A includes $2 million of mark-to-market for share-based compensation.

[Trevor Turnbull, Analyst]

Okay. And sorry, do you remember what the -- just the stock-based comp number was, with or without that?

[Hume D. Kyle, Executive VP & CFO]

No. I can get back to you, but I don't know what that is right off the bat.

[Operator]

[Operator Instructions] I am not showing any questions at this time. I would like to turn the call over to Rick Howes for any further remarks.

[Richard Allan Howes, President, Chief Executive Officer & Director]

All right. Well, thank you for joining us this morning, and I wish everybody a good weekend. Thanks. Bye.

[Operator]

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program, and you may all disconnect. Everyone, have a wonderful day.