Lundin Gold Inc

TSX:LUG

Earnings Call Transcript 2020-Q2

[Operator]

Good morning. My name is Veronica, and I will be your conference operator today. At this time, I would like to welcome everyone to the Lundin Gold Q2 2020 Results and Operations Update conference call. [Operator Instructions] Mr. Hochstein, you may begin your conference.

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

Thank you, Veronica. Good morning, everyone, and thank you for joining us for our first conference call to report Lundin Gold's quarterly results. While activities were suspended this past quarter, we think it is important to review what we accomplished during the first half of this year in anticipation of reporting full operating results next quarter. Participating with me today is Alessandro Bitelli, Executive Vice President and Chief Financial Officer. I will start with a brief review of the highlights for the quarter and first half of the year. Following that, Alessandro will speak to the financial results, and then I'll give an update on operations at Fruta del Norte. Afterwards, there will be time for questions and answers. This discussion includes forward-looking information. Actual future results may differ from expected results for a variety of reasons described in the caution regarding forward-looking information statements section of our press release. All amounts are in U.S. dollars unless otherwise indicated. To say that the second quarter of 2020 was challenging is an understatement. And I'm very happy that it is in the past and that we can look forward to 2 strong operating quarters for the balance of 2020. That said, a lot was accomplished under difficult circumstances. This quarter was truly unique for Lundin Gold in just about every aspect. As great milestones in the first quarter, such as achieving commercial production 2 months early and on budget were quickly followed by the suspension of operations due to the impacts of the COVID-19 pandemic in Ecuador. The suspension of operation is driven by fear of the virus in the local and provincial communities near Fruta del Norte. Due to these local concerns, transportation of goods and personnel to site required for operations became very difficult. In May, the company worked with the national government to reopen the transportation corridors. It was only then that we were able to restart bringing in supplies to our mine site and shipping concentrate held on-site. In June, following the acceptance of a national protocol for the mining industry and the implementation of our own protocols, we were able to resume personnel rotations. In Ecuador, a number of cases of COVID-19 are relatively flat with the focus the shifting from Guayaquil to Quito. In the provinces Zamora-Chinchipe where Fruta del Norte is located, cases remain relatively low by comparison to the rest of the country. Based on the results from our own testing campaign, which is conducted prior to admission in this site, about 7% of our employees and contractors are testing positive and cannot go to site. As of July 31, there have only been 6 cases of COVID-19 confirmed at Fruta del Norte, all of whom have fully recovered. Over the last 6 months, the company has been working to support local communities in their fight against COVID-19. Our support has entailed the purchase of disinfection equipment for local police, army and governance, neighborhood doctor programs, purchase of food parcels for families in difficult economic situations and purchase on medical and PPE supplies for local governments and the Ministry of Health. At site, there is not 1 procedure that has not been affected by COVID-19. And Lundin Gold spent the second quarter of 2020 adapting in our operations in response to the pandemic. Strict protocols were implemented, which include an offsite quarantine period, followed by a PCR test for all employees and contractors prior to access to Fruta del Norte. Mandatory use of PPE, health monitoring, physical distancing and enhanced disinfection and restricted access to common areas. Along with implementing COVID-19 protocols, the team that remained at site during the suspension carried out a number of activities, Limited mine development and stope drilling were carried out to facilitate the restart of mine production and maintenance of mine infrastructure such as roads power, ventilation and dewatering systems were also completed. Crushing plant maintenance was carried out, and we realigned the SAG mill as well as other maintenance. All of this enable us to resume operations quickly and safely at the beginning of July. Mine and mill ramp-up is ahead of schedule, and I'll provide an update on this later in the call. On the health and safety front, the total recordable incident rate for the first half of the year was 0.41 for 200,000 hours worked, and there were no recordable incidents during the quarter. I would like to take this opportunity to, again, thank everyone at Lundin Gold for their efforts and dedication during these challenging times. Their work and dedication were critical to ensuring a safe restart of operations. 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. Good morning, everyone. Lundin Gold achieved commercial production in late February and started recognizing revenues on March 1. Since then, end of June 30, the company recognized net revenues of $50 million based over 30,906 ounces of gold at an average realized gold price of $1,680 per ounce of gold sold. This is in addition to 35,208 ounces of gold sold in January and February prior to achieving commercial production. These net proceeds of $52 million were recorded as a credit towards capitalized construction costs. Effectively, we sold over 66,000 ounces of gold in the first 6 months of the year. Notwithstanding being in a commissioning and ramp-up mode early in the year and with suspended operations in the second quarter. Of 30,000 ounces sold between March 1 and June 30, 10,727 ounces of gold was in doré and 20,179 ounces of gold was in concentrate. This includes 2,430 ounces in doré and 4,367 ounces in concentrate that were produced in the first quarter prior to the onset of the temporary suspension that were held at site during the suspension. Cash operating costs were $876 per ounce for the 4-month period from March 1 to June 30 after the achievement of commercial production. All-in sustaining costs for the same period were $952 per ounce. 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, all net of silver revenue. Suspension costs are not included in this calculation. As to our results for the period, I naturally need to emphasize the 2 unique elements that account for our loss of $73 million in the first half of 2020. Suspension costs of $29 million and a derivative loss of $28 million. Let me first address the derivative loss. This is not a finance cost and certainly not a current cash cost, rather is the result of the application of complex accounting principles. 2 of the 3 elements of the Fruta del Norte project finance debt, the gold prepay in the stream are accounted for at fair value. Its fair value is linked to specific gold equivalent ounces under the loan and to the gold price, and more specifically, to the forward gold price. During periods of increasing gold prices like we have now, forecast forward prices will also generally increase. This, combined with a factor for volatility results in a higher estimated fair value of the debt obligations on the balance sheet and the recognition of derivative losses. It will ultimately result in a higher cost of debt if, and only if, gold prices remain high at time of loan repayments. That said, notwithstanding this potentially higher future cost of debt, there is nothing to complain about higher gold prices. These would also increase the amount of revenues that will be generated from production during the same future period when the debt obligation will be repaid. And this revenue impact, given our production horizon will be exponentially greater than the higher cost of debt. As to the suspension cost, there are onetime costs as we have now returned to operations. They may appear high, but one must consider that we had to carry the wage burden of our full employee base due to Ecuadorian labor laws, and that was $13 million over the almost 3.5 months of suspensions. In addition, our site care and maintenance programs were very active in all areas, from the mine, to the plant and ongoing site services, as previously mentioned by Ron. We wanted Fruta del Norte to be in the best possible position to quickly and safely restart operations, and Ron will talk to this next. In addition, with new health and safety protocols in place, we have incurred, and for the time being, will continue to incur COVID-19-related costs. Considering that we have yet to fully ramp up operations since achieving commercial production and in light of current oil prices and estimated operating cost per ounce based on forecast production during the second half of 2020, and the majority of which we estimate would be sold within the same period, we look forward to very strong operating results between now and the end of the year. As a final note about achieving commercial production. With this milestone, we also commenced recording interest expense in the income statement, $16.7 million since March 1, while making scheduled principal and interest payment of $14.4 million against our long-term debt. A final comment as to our liquidity. Despite this difficult quarter, our treasury was sufficient to support our activities and meet our existing loan obligation. As of June 30, the company had cash of $74 million, which includes $41 million from the financing that closed in early June. This treasury is more than adequate to fund our restart of operations. And as we move into the fourth quarter and then into 2021, we anticipate generating net sales receipts well in excess of the obligation, which will come during the next 12 months. For a more detailed discussion of our financial results, I refer you to our MD&A. Now I'd like to turn the call back over to Ron.

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

Thank you, Alessandro. As you know, Fruta del Norte restarted its operations in early July. And so far, things have gone very well. Regular concentrate and doré shipments have restarted and shifts to part Ecuador weekly with concentrate. In the last month, the mill has processed ore at an average daily rate of 3,250 tonnes per day, while mill recoveries were higher-than-planned in July. Further optimization still needs to be done in order to reach design levels. Mine development is also going well. And in accordance with the mine plan, we're now extracting ore from one of the high-grade zones, which was converted from drift-and-fill to transverse long-hole stoping. In July, the mine extracted 25% more ore than planned. With the second quarter in our rear-view mirror, as Alessandro alluded to, we are looking ahead and see a bright future for lending growth. At this point, we are comfortable reconfirming our gold production forecast and put it on our K for the second half of 2020 in the range of 150,000 to 170,000 ounces, together with actual production achieved prior to the on-site temporary suspension, total 2020 gold production is estimated to be between 200,000 and 220,000 ounces. This is based on an average daily production of 3,200 tonne per day at an average head grade of 10 grams per tonne in the second half of 2020. Average gold recovery is anticipated to be approximately 85% during this time. All-in sustaining costs for the second half of 2020 is expected to range between $770 and $850 per ounce of gold sold. With gold prices near all-time highs, Lundin Gold is well positioned to generate strong operating cash flow in the second half of this year. Work on completing of the south ventilation raise resumed in June. Due to a localized ground fall, raise had to be filled with concrete. We're now setting up the ground to raise prior to the restart of raise boring. Despite this setback, we still anticipate being able to use the self-ventilation raise by the end of the year. We are also currently studying the feasibility of increasing production from the current capacity of 3,500 tonnes of ore per day. These studies targeting increased mine and mill production are proceeding well, and we're currently evaluating the potential implementation of these improvements for 2021. We'll have more information on this initiative within the next few weeks. In addition to the potential increase in throughput, we're also planning a resource expansion drilling program, which we anticipate starting late this year. This will be in addition to our regional exploration program. Finally, I would like to thank Tamara Brown for the valuable service and contributions during her time on our Board and wish her all the best in her new endeavor. I would also like to welcome Bob Thiele to our Board, who has replaced Tamara as Newcrest's representative. Bob has over 35 years of operational and corporate project and mining experience and currently serves as General Manager, Technical Services and Business improvement for Newcrest. Thank you, everyone, for attending. And now I will open the call to questions. But prior to opening the call to questions, I want to mention that Dave Dicaire is also on the line here in case there are some technical questions. And I just want to publicly thank Dave for his commitment and dedication. He has been at site since March. I will be heading to Ecuador shortly to give him a bit of a break. But he's been a key player in our access and successful start-up of Fruta del Norte. So I just want to say thank you, Dave, for everything you've done. And now, Veronica, we'll open it up to questions.

[Operator]

[Operator Instructions] Your first question comes from Trevor Turnbull with Scotiabank.

[Trevor Turnbull, Analyst]

Ron, I just wanted -- I guess, kind of a housekeeping question to start. You talked about the recoveries you're expecting in the second half. And obviously, that's going to move up towards your targeted level next year. What's kind of the difference between the 85% you're looking for? And what takes you back to 92%?

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

We -- thanks, Trevor, for the question. Yes, we have made some modifications. They were small things during suspension, things such as just improving the floatation reagent distribution in the rougher cells. What we think the biggest issue now we need to focus on is retention time in the flotation area, Trevor. And so we're looking at the configuration of ourselves with the existing bank we have to try and look at increasing retention. That's probably one of the biggest areas we see right now. And then other areas is just tweaking in terms of the CIL and gravity.

[Trevor Turnbull, Analyst]

So it's more configuration. It's not as if you -- but if in a worst-case scenario, would you have to add a bit of capacity for retention?

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

That's the worst-case scenario. That's the right, Trevor. But we're not talking about full banks. We're talking about just a few cells. The team is making a lot of progress. And even we mentioned that recoveries were much better anticipated in July. Even in August, we've seen a 2%, 3% improvement in recoveries. So the team are getting more comfortable with everything. So yes, we're not talking about anything significant.

[Trevor Turnbull, Analyst]

Okay. Understood. And then the only other question I had was with respect to the comments in the MD&A with respect to starting to develop more of the long-hole stopes versus, say, cut-and-fill. And I was wondering also, as you look at expansion and optimization, is there an opportunity for you now that you've got some experience with the ground conditions and you're in there to perhaps move more of the mine plan towards long-hole? And would that be something that we would expect to see in some of these technical studies that you have underway?

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

Yes. Trevor, the 2020 life of mine plan that we published for this year's budget, we still had drift-and-fill. So we will see the opportunity, particularly in this one area that we're in right now, and that's a fairly significant area, and we will be converting that to long-hole stoping. So we will start to see that, those economies in 2021, life of mine plan. In terms of the other drift-and-fill areas, they are deeper in different parts of the mine. So until we get down there, we won't know whether we can convert those or not.

[Operator]

Your next question comes from Kerry Smith from Haywood Securities.

[Kerry Smith, VP, Director & Senior Mining Analyst]

Ron or maybe, Dave, do you have your manpower at the site now at the levels that you need? Are you at full capacity with your employees? Or are you still needing to add a few people because you have people, the 7% that can't come to work basically?

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

Dave, you want to go ahead and answer that, because you have better feeling on our staffing plans.

[David Dicaire, GM & VP of Projects]

Yes. Thanks, Kerry. We are staffed up to be able to fully operate. We do have, as part of our original ramp-up plan, more mine operators and people coming on in the mine. So we're in the process of recruiting those. We have a small percentage that are working from home office, administrative, technical types that don't need to be on site. But right now, we have about 700 people on site. And we're adequately staffed, and we probably need to add about another 100 to 150 people over the next couple of months. But it's not an issue recruiting. It's just meeting the ramp-up schedule and the mine requirements.

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

Okay so you -- and Kerry, just to add to that, it was one thing we kind of learned early on is when you're looking at your staffing, you do have to allow now for these potential positive cases. And you may have to bring more people on in the event you do lose some people come up positive. So it was part of the learning experience early on.

[Kerry Smith, VP, Director & Senior Mining Analyst]

Right. And so you're not expecting any issues to hire this extra, call it, 150 people. I guess, a lot of them are -- they're not tradespeople. They're operators, I guess, or they are laborers.

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

Dave, do you want to answer that?

[David Dicaire, GM & VP of Projects]

Yes, they're combination of operators, laborers, tradespeople, and we're finding the markets, right now, for recruiting, very favorable. We have done a significant amount of recruiting in the last couple of months. And we're finding a lot of availability in-country and in the region to fill the positions.

[Kerry Smith, VP, Director & Senior Mining Analyst]

Okay. Okay, great. And then, Ron, I don't know, can you comment about the actual recovery that you realized in July just so I can benchmark it against the 85% that you're expecting for the second half?

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

The numbers -- the preliminary numbers that we've got, we were in the 82%, 83% range, Kerry, when our regional plan was 70%. So yes, the team, they're doing jobs, still more work to do, but we're getting there.

[Operator]

[Operator Instructions] Your next question comes from Kip Keen with S&P Global Market Intelligence.

[Kip Keen, Research Analyst]

Ron, just curious if you could walk me through a little bit, what permitting might look like foreign expansion? Would it just be an amendment to existing permitting? I realize you could be the -- kind of trailblazing there a little bit, too. So yes, can you tell me a little bit about that?

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

Yes. Thanks for popping for the question. It's a good question. Yes. We are trailblazing. We're working as we've done from the start with Fruta del Norte. We're having to work hand-in-hand with the governments. Obviously, what we're showing is that the -- we're looking at this as sort of a 2-phase expansion. First phase, potentially impacting 2021. We are -- our initial results from our internal studies and everything and show there really are very insignificant impacts. And that's what we've started the discussion with the appropriate ministries regarding that. And initial indications are this would just be essentially showing no significant impact, and it would be just an approval from the Ministry of Environment to move forward and then filing with the Ministry of Mines, the appropriate revised work plans. The higher -- the Phase 2 in that may require some amendments to our environmental management plan. But at this point in time, based on what we're seeing, we do not see a need to do an EIA or anything like that based on the scope and the impacts of the expansions.

[Kip Keen, Research Analyst]

Okay. And then just one other. Would you be looking at adding any more cushion in terms of financing in the next 6 months or so or near-term with gold prices high? But I understand you said basically you're banking on cash flow to be sufficient to cover your needs. Any thoughts there?

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

Alessandro, do you want to take that one?

[Alessandro Bitelli, Executive VP & CFO]

Sure. The answer is quite simple. And obviously, we have $74 million in the bank. And we expect that to be quite adequate to satisfy our short-term needs as we restart operations. Cash flow will take care of the rest. We have no immediate plans to raise additional fund at this point in time.

[Operator]

So Mr. Hochstein, there are no further questions at this time. Please proceed.

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

Okay. Thanks, Veronica. Once again, thank you, everybody, for attending our first quarterly call. And as always, if there are further questions, please feel free to contact either myself or Sabina. And again, thank you, everybody. Be safe, be healthy, and have a great day. Thank you, Veronica.

[Operator]

Thank you very much. So ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Thank you.