Lundin Gold Inc

TSX:LUG

Earnings Call Transcript 2021-Q1

[Operator]

Good morning. My name is Annas, and I'll be your conference call operator today. At this time, I would like to welcome everyone to Lundin Gold's First Quarter 2021 Results Conference Call. [Operator Instructions] Thank you. Mr. Hochstein, you may begin your conference.

[Ronald F. Hochstein, President, CEO & Director]

Thank you, Annas, and good morning, everyone, from Fruta del Norte. I hope you're doing -- all doing well wherever you may be. Thank you for joining us on this conference call today where Alessandro Bitelli, Executive Vice President and Chief Financial Officer and I, are going to take you through our results for the first quarter of 2021. To begin with, I will provide an overview of our first quarter of 2021 achievements, give an update on operations at Fruta del Norte, several key value-driving catalysts to watch in the remainder of 2021. After that, Alessandro will discuss our financial results in more detail before I finish things off with my concluding remarks. We will then open the call for questions. Please note, Lundin Gold's disclaimers on this slide. This discussion includes forward-looking information. Actual future results may differ from expected results for a variety of reasons described in the cautionary regarding forward-looking information, Information and Statements section of our press release. Lundin Gold is a U.S. dollar reporting entity and all amounts in this presentation refer to U.S. dollars, unless otherwise indicated. As you're all aware, the COVID-19 pandemic has presented numerous unique challenges that Lundin Gold and all of us have had to navigate. The pandemic continues to significantly affect the local communities near Fruta del Norte. Ecuador was hit with its third wave near the end of the quarter, and the situation in country has worsened considerably. While the vaccination program is proceeding in Ecuador, it is doing so slowly. As such, the company continues to support local government, administrative health initiatives, including donation of medical supplies and equipment to local hospitals, disinfection equipment to local authorities, and transportation services for doctors to reach rural areas. Moreover, Lundin Gold also provides essential equipment to frontline workers in the communities surrounding Fruta del Norte. These efforts to help our local communities are amplified through our communication campaign, which has continued to run during the first quarter of 2021 in conjunction with local government. To promote COVID-19 proactive -- protective measures in communities. To date, Lundin Gold spent approximately $800,000 on COVID-19 relief. Given the rise of COVID variants and the severity of the third wave of the pandemic in Ecuador, we have implemented a number of additional protocols at Fruta del Norte, which include a second PCR test 5 days after arrival on site, shutting down of all extra curricular activities such as gymnasium, soccer and other activities, and increased use of KN95 masks. We continue to be vigilant in monitoring all of our employees and the ongoing situation. Lundin Gold, in partnership with Newcrest Mining and SolGold, committed to purchase and install the equipment for establishment of an intensive care unit at the Yantzaza Hospital to improve intensive care capabilities in the province of Zamora Chinchipe. 136 pieces of medical equipment have been purchased and donated. The provincial government carried out a number of structural modifications to the whole hospital, and the Ministry of Health has provide training and personnel for the ICU. On April 28, the ICU was officially inaugurated and is now treating critical COVID patients. The ICU will benefit over 76,000 residents in the province. As another integral part of its sustainability program, Lundin Gold has long prioritized actions to improve the quality of local education, particularly in Fruta del Norte's area of influence. The COVID-19 pandemic forced local schools closed in March 2020, and since then, they have not been reopened. As a result, children are facing enormous difficulties. Coming remotely communities where local Internet infrastructure is weak or nonexistent. And many families struggle to provide children with the appropriate tools to access to the Internet. During the first quarter of 2021, Lundin Gold launched a connectivity project called Estamos Conectados, together with the local education authorities, the national government and local stakeholders to improve Internet infrastructure and communities surrounding Fruta del Norte and to provide teachers and children enrolled in local schools with necessary training and equipment to facilitate online learning. Lundin Gold has contributed more than $500,000 towards this project. I'm happy to report and very appreciative that some of our key services providers and lenders have also committed to support this initiative financially. Education is a key for Lundin Gold sustainability strategy and the Estamos Conectados program will help strengthen their educational system in Fruta del Norte's area of influence and in turn, increase employability and aid economic diversification within the local communities. We continue to work on this ongoing project and look forward to providing updates on its development over the coming months. Now let's discuss our results this past quarter. The first quarter of 2021 marks the first anniversary of the achievement of commercial production at Fruta del Norte. Since then, notwithstanding the temporary suspension of operations caused by the COVID-19 pandemic, operating results have consistently met or exceeded expectations. These excellent results continued during the first quarter of 2021, with record production of 104,137 ounces of gold, consisting of 70,642 ounces in concentrate and 33,675 ounces doré. Sales in the first quarter were 81,805 ounces, consisting of 49,198 ounces in concentrate and 32,607 ounces as doré and a low cash operating cost of $672 per ounce sold. And an all -- average all-in sustaining cost of only $830 per ounce sold. As many of you realize, the difference -- or notice, the difference between ounces produced and ounces sold was due to processing very high-grade ore during the latter part of the first quarter, resulting in double the amount of gold inventory at March 31, 2021 compared to December 31, 2020. These ounces produced late in the first quarter were sold subsequent to quarter end. As these sales occurred in the quarter, quarterly financial results in net income, operating cash flow and ASIC would have been even stronger. In the mine, operating performance was in line with expectations, with 365,000 -- just over 365,000 tonnes mine, consistent with results in the fourth quarter of 2020. Underground mine development also continued as planned with a total of 2,450 meters of development completed during the quarter. We continue to see excellent reconciliation of both tonnes and grade with the original resource block model. On the processing side, the mill achieved an average throughput of 3,607 tonnes per day, and the average grade of ore mill was 11.4 grams per tonne, with average recovery at 87.8%. We continue to fine-tune and processing plant to improve recoveries as we mine and process different types of ore. The throughput expansion modifications are also expected to improve mill recoveries through the addition of retention time in the flotation circuit. The company is on track to meet its 2021 guidance of 380,000 to 420,000 ounces of gold produced at Fruta del Norte. It is important to note that production will vary somewhat over the next 3 quarters. Production is planned to be lower in the second and third quarters compared to the fourth -- first quarter, mainly due to lower grade. There will be an increase in the fourth quarter due to both higher grades and higher throughput, following completion of the throughput expansion program. ASIC guidance for 2021 also remains unchanged, forecasted between $770 and $830 per ounce of gold sold, calculated on a basis consistent with prior periods. I also want to highlight 2 important capital project activities, which are still part of the construction scope of Fruta del Norte and nearing completion. First, construction of the company's Zamora River bridge is progressing according to plan, with installation to main suspension cables completed as well as the launching platform from which the bridge, platform modules are placed. Happy to announce all the bridge modules have been put in place and completion of the bridge is expected before the end of the second quarter of 2021. Work on the South Ventilation Raise is continuing. With completion of pilot hole expected this month, we continue to make progress with the final meters of pilot hole but they have been challenging. We are now at the point where we are drilling from the underground to aid in the completion of the pilot hole. Once the pilot hole is complete, we will immediately begin reaming of the raise. Completion of the SVR is now anticipated for the third quarter of 2021. We do not expect this delay to impact plant production for 2021. Operational excellence is only 1 of our 4 pillars of value creation. And as such, we continue to advance our throughput expansion program, the resource expansion program and recently announced the commencement of our regional exploration program, with a second drill now turning at the Barbasco target. The throughput expansion program to increase the mill throughput from 3,500 to 4,200 tonne per day is continuing on schedule and on budget, with detailed engineering and procurement of equipment and materials completed during the quarter. The civil contract was mobilized in Q1, and earthworks and flotation concrete works are now complete. Under its sustaining capital activities for 2021, lending mill remains on schedule with work being carried out on the TSF. And with that, the first raise of the tailings dam is now complete and work on the second raise has begun. Conversely, while the resource conversion program has begun, progress was slower than planned as a result of COVID-19 issues encountered on bringing the second derating crew in from Peru. The delay has allowed us, however, to complete all the development required to set up the drill stations to drill the very exciting Southern extension. Activity in this program has picked up during the second quarter. I'm especially excited about our 9,000-meter regional exploration program, where drilling began at the end of March 2021. This drilling campaign is focused on 2 high-priority targets, Barbasco and Puente-Princesa, to test for mineralization in a geological setting, very similar to that of Fruta del Norte. The first hole in the Barbasco target was in progress at quarter end, and the second rig began drilling in mid April. The first hole is now complete, and the rig is being moved to a new location. Initial results indicate that we are on the periphery of an epithermal system. Assay results are not expected until some time in Q3 2021. Now I'd like to turn the call over to Alessandro for a more detailed look at the financial results. Alessandro?

[Alessandro Bitelli, Executive VP & CFO]

Thank you, Ron, and hello, everyone. In the first quarter of 2021, the company recognized revenues of $140 million from sales -- from the sale of 81,805 ounces of gold, consisting of 49,000 and change of concentrate and over 32,000 of doré at an average realized gold price of $1,765 per ounce. This is offset by cost of goods sold of $76 million, which is comprised of operating expenses of $46.8 million, royalties of $8.2 million and depletion and depreciation of $21 million. During the same period in 2020, revenues of $36.9 million were recognized from the sale of 24,000 ounces of gold during the 1-month following achievement of commercial production. Lundin Gold generated net income of $86 million during the first quarter of 2021 compared to a net loss of $9.3 million during the first quarter of 2020. Net income included a derivative gain of $51.5 million as a result of a decrease in the fair value of our gold prepay and stream loan facilities, driven by lower estimated forward gold price compared to December 31, 2020. This is a noncash item and the volatile nature of these derivative gains and losses, also seen in many of the prior quarters, is expected to continue given the volatility of forward gold prices. The MD&A provides a detailed explanation of the impact of fair value accounting of these 2 credit facilities and the determination of derivative gains and losses. Deducted in our net income for the quarter are finance expenses of $12.1 million and other expenses totaling $6.5 million as well as income tax expense of $10.9 million. During the first quarter of 2020, a net loss of $9.3 million was generated primarily due to revenues and related operating costs, reflecting only the short period of time between achieving commercial production near the end of February 2020 and the suspension of operation in late March due to COVID-19. Suspension costs incurred to the end of March 2020 also added to this loss. Income taxes were accrued for the first time this quarter. They are comprised of current income tax expense of $8 million and deferred income tax expense of $2.9 million. The deferred income tax expense related to the derivative loss in other comprehensive income. Current tax expense is generated from estimated net income tax further. And net income for tax purposes in Ecuador for the quarter calculated at the rate of 22%. In addition to corporate taxes, current income tax expense includes an accrual for the portion of profit sharing payable to the government of Ecuador, which is calculated at the rate of 12% of the estimated net income for tax purposes for the quarter. The employee portion of profit share in payable calculated at the rate of 3% of net income for income tax purposes is considered an employment benefit and is included in operating expenses. It should be noted that profit sharing is deductible costs for income tax purposes. Corporate income taxes accrued at the end of March 2021 actually offset by tax values available for use by the company. Actual profit sharing payable to the government of Ecuador and the employees will be based on 2021 fiscal results and payable in 2022. We expect the company to generate significant cash flow in 2021. And in line with this, during the first quarter, the company generated cash flow of $75.1 million from operations or $0.33 per share. Adjusted earnings exclude specific items that are significant, but not reflective of the underlying operating activities of the company. Presently, for Lundin Gold, these include costs incurred during the suspension of operation in 2020 and derivative gains and losses with the related income tax effects. As a result, excluding derivative gains of $51.5 million and the related income tax expense of $3 million, adjusted basic earnings of $37.4 million were realized in the first quarter of 2021 or $0.16 per share. Cash operating costs for the quarter were 672 per ounce of gold sold. This higher result compared to the previous quarter was largely due to a mill shutdown for regulator maintenance during Q1. All-in sustaining costs achieved in the first quarter totaling $830 per ounce of gold sold were also higher than the previous quarter. Compared to 2020, ASIC was affected by higher sustaining capital expenditures as certain projects were deferred in 2020 due to the COVID-19 pandemic and such as the first raise of the FDN tailings dam as well as the disparity between gold produced and gold sold due to timing. We calculate these non-IFRS measures based on gold ounces sold. For reference, all-in sustaining costs include operating costs, royalties, corporate social responsibility costs, treatment and refining charges, accretion of restoration provision and sustaining capital, net of silver revenue. As indicated earlier by Ron, and based on our mine plan, higher grade oil was mining processed in March compared to January and February. This led to high gold inventories at quarter end, which translated into sales only after quarter end. Had production occurred more evenly throughout the quarter, production and sales will have progressed in parallel generating more revenues, higher income and operating cash flows as well as lower ASIC per ounce of gold sold during Q1 2021. This is simply a timing difference, and we were, therefore, not surprised to realize record monthly sale in April of over 50,000 ounces. As briefly touched upon earlier, the company generated a total $75.1 million of operating cash flow in the first quarter of 2021. At March 31, 2021, the company had cash of $94.4 million and a working capital balance of $57.6 million compared to cash of $79.6 million and a working capital balance of $56.6 million at December 31, 2020. The change in cash during the first quarter of 2021 was primarily due to cash generated from operating activities and proceeds from stock option exercises of $5.2 million. This was offset by principal and interest repayments and the loan facilities totaling $52.2 million and a cash outflows of $12.9 million for capital expenditures, including costs for the remaining initial construction activities, the expansion project and sustaining capital. The company expects to continue generating strong operating cash flow during 2021 based on its production and guidance. The strong operating cash flow will support debt repayments, regional exploration and underground expansion drilling at Fruta del Norte as well as planned capital expenditures, including the throughput expansion project. Monthly payment under the stream facilities will be based on 7.75% and 100% of gold and silver ounces sold, respectively calculated as the current gold and silver prices at the end of each month, less $404 per ounce, respectively. Stream payments are calculated in due based on final assets from smelters and refinery. Therefore, there is not necessary a direct correlation between stream repayments and coal balances produced and sold in a given period, which are based on mine site assays. Quarterly payments under the gold prepay facility are expected to be based on the current value of 9 -- 775 ounces of gold at the end of each quarter. Scheduled variable quarterly payments, principal repayments of the senior debt facilities will total $35 million for the remainder of 2021 with lower repayments in the second and third quarter compared to this past quarter and the last quarter of the year. The company is working towards achieving construction completion as defined under the senior debt facilities in 2021. Depending on the timing of this milestone, additional quarterly principal repayments based on 30% of Fruta Norte's excess cash flow, also defined term in the senior debt facilities, could also occur. The current portion of long-term debt includes an estimate of the additional quarterly repayments, as a result of reaching completion in 2021. An accelerated reduction of principal under the facilities will then reduce the company's related finance costs going forward. In summary, a very strong quarter of production with financial results in line with expectations and sales and revenue catching up to production in. A more detailed discussion of our financial results can be found in the MD&A, and I refer you to this document for more information. Now I'd like to turn the call back over to Ron.

[Ronald F. Hochstein, President, CEO & Director]

Thank you, Alessandro. Looking towards the remainder of 2021 and further into the future, we, Lundin Gold, have identified 4 key pillars to drive shareholder value. The first is operational excellence. As I already outlined, we're on track to meet our 2021 guidance of gold production between 380,000 and 420,000 ounces. Based on an average head grade of 10.4 grams per tonne gold, an average gold recovery of 90%, while also estimating 2021 ASIC of between $770 and $830 per ounce sold. We always strive to maximize production and minimize costs, and we will continue to push the mind towards what we believe is achievable. Our throughput expansion program, which will increase mine and mill throughput by 20%, is advancing on time and on budget. All key pieces of equipment have been ordered. Detailed engineering is complete, and construction is now well underway. The underground resource expansion program has been progressing slower than which was we planned, but activity in this program will pick up in the second quarter. From this expansion program, we see an opportunity to increase our current resources, focusing on the Southern extension of Fruta del Norte. Currently, only inferred mineral resource and on areas within the existing current reserve foundries with the opportunity to convert existing resources into reserves, and also to increase resources. And finally, we're extremely excited to have begun our regional exploration program, with 2 rigs now drilling on the high priority of Barbasco target. As a reminder, the 2 targets of this program, Barbasco and nearby Puente-Princesa are located only 7 kilometers South of Fruta del Norte, along the 16-kilometer long Suarez Pull-Apart Basin structure. Our objective is to discover another Fruta del Marta. Before finishing, I would quickly like to take this time to mention that I'm very proud of what this Lundin Gold team has achieved in the first quarter of 2021. But more than that, I'm proud of what Fruta del Norte has been able to provide local communities, benefiting them both economically and socially. Mining will play a key role in Ecuador's economic growth for years to come, and it's very exciting to be such a prominent player in the early development of large-scale mining in the country. I'm excited for further developments and updates in 2021 and believe that Lundin Gold has positioned itself well to continue generating strong shareholder value in the future. Thank you for your continued support. With that, I will now open the call to questions. Annas?

[Operator]

[Operator Instructions] Your first question comes from Bryce Adams, CIBC.

[Bryce Adams, Analyst]

Yes. I think everything is fairly well discussed here. Just wanted to touch on a few things. Firstly, the regional drilling. Ron, the first results we expected in Q3, was that previously Q2? Do I have my lowest cost? Or has there been some movement on the timing of those assay results?

[Ronald F. Hochstein, President, CEO & Director]

The Q2, we were thinking in the expand -- we had something on the expansion program, Bryce, in Q2, but that got up slowly, as I mentioned. We talked about the delay in getting that second drill. But also the drill that we did have underground for the expansion program, we did kind of redirect that a little bit to help on this -- on the SVR. So it was the Q2. Barbasco was always going to be a little later in the year just because of the longer holes. We're drilling close to a kilometer and just the time it takes to get those -- at the samples, not to Peru and launch this back. So there's difference between the 2 programs. Yes.

[Bryce Adams, Analyst]

I might have been a little overexcited. I was hopeful for Barbasco results in Q2.

[Ronald F. Hochstein, President, CEO & Director]

We all are.

[Bryce Adams, Analyst]

And just on that, on Q2, we're halfway through Q2, you said grades will be lower for Q2 and Q3. Can you talk to the fee grade that you put through the mill in April and maybe the early part of May?

[Ronald F. Hochstein, President, CEO & Director]

We're running right now, more close to our average grades, Bryce, and that's the forecast for this quarter. So even our average grades are still pretty good, but that's currently what we're running.

[Bryce Adams, Analyst]

Okay. So maybe something closer to reserve grade for Q2 and Q3 and then a bump in Q4, that would bring the full year average to the 10.4 grams per tonne in the guidance range?

[Ronald F. Hochstein, President, CEO & Director]

Correct. Yes.

[Bryce Adams, Analyst]

And on the LTI from Q1, could you talk to what happened there? Was the incident workshop or underground? How is the injured person recovering? And more generally, what's the definition of an LTI at Lundin gold because we do see some variance in that definition from company to company?

[Ronald F. Hochstein, President, CEO & Director]

Yes. Well, let me start with the last question., essentially, that the person was not able to return to work due to the impact. The LTI in Q1 was at underground, and it was a -- there's a rockfall, a very localized rockfall. The employee is doing fine. But he was not able to return to work, he had to go under some observation for a little while. It was a very small rockfall, and we've done a lot of investigation into that since then.

[Bryce Adams, Analyst]

Okay. So not a crush injury, maybe a laceration?

[Ronald F. Hochstein, President, CEO & Director]

It wasn't even a laceration or it was just a small -- it hits sort of on the head and shoulder and just needed to take some time, some observation time.

[Operator]

We have a following question from Arun Lamba with TD Securities.

[Arun Lamba, Associate]

Congratulations on the good quarter guys. Just on the South Ventilation Raise being finished in Q3 now. I know you haven't given guidance for next year. But can you just give some color on how that might affect next year? If it were to get delayed or anything on if it does? I know 2021 guidance is not affected, but just on the potential implications, if it's not done?

[Ronald F. Hochstein, President, CEO & Director]

Obviously -- Arun, thanks for the question. Yes. If this pushes out, we feel we've got float to take this through the end of the year. So we still have a few months' float even in our current schedule. We -- what we're finding with the ventilation systems that we have, we are able to keep the throughput up and even increase the throughput to the 4,200 tonne per day with the existing ventilation. So we have some float. Obviously, if this gets pushed into next year, it may have an impact, but everything we see now for this year, we feel we're in good shape, plus we still have a 3-month float to get this thing done. And we are much closer now. Because as you've said before, we kept our -- our efforts were all coming from surface. We've got the pilot hole now close enough and what we essentially have is just an area of unconsolidated ground and it makes it very difficult to continue to drill the pilot hole. So we're coming up from underground to help to increase the circulation and be able to finish this hole. All the work has been done on the -- in order to start there, the reaming head is sitting there ready to go. So as soon as it's probable with everything, we'll start with the reaming right away.

[Operator]

[Operator Instructions] It appears there are no further questions at this time, Mr. Hochstein, you may proceed.

[Ronald F. Hochstein, President, CEO & Director]

Great. Okay. Thank you, again, everyone, for attending the call this morning. And above all, stay safe, stay healthy, and we look forward to continuing to provide information on the regional program, underground and completion of this SVR. I'm the one that wants to able to announce that more than anybody. So again, thank you for your attendance, and be safe. Thank you.

[Operator]

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.