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Lundin Gold Inc
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Good morning. My name is Chris, and I will be your conference operator today. At this time, I would like to welcome everyone to the Lundin Gold Third Quarter Results Conference Call. [Operator Instructions] Mr. Hochstein, you may begin your conference.
Thank you, Chris. Hello, everyone, and thank you for joining us for our third quarter results conference call. Participating with me today is Alessandro Bitelli, Executive Vice President and Chief Financial Officer. With the first full quarter of production under our belts, Fruta del Norte has demonstrated what it is capable of achieving. And I will start the call by reviewing our operating highlights. Following that, Alessandro will speak to the financial results. And then I'll give an update on our operations and our outlook for the remainder of the year. 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 and statements section of our presentation. All amounts are in U.S. dollars, unless otherwise indicated. Fruta del Norte's ramp-up and solid production results following a 3-month suspension of operations due to COVID-19 is a result of the work the team did during the suspension. The mine ramped up well, and we mined about 265,300 tonnes of ore. And in September, reached an average mining rate of 3,750 tonnes of ore per day. Underground mine development remains in line with our current plan, and we continue to encounter better-than-expected ground conditions. During the past quarter, we began pulling from stopes in one of the high-grade areas, which was originally planned to be mined by drift-and-fill methods but have been switched to long-hole stoping. Work continues on the South Ventilation Raise. The pilot hole is being redrilled. However, we are running into voids, which require pulling the steel and grounding. As a result, drilling has been delayed and ultimately, completion of the raise. At this point in time, we estimate completion in early 2021. This delay is not expected to impact 2020 mine production or early 2021 production plans. The process plant also operated better than planned and processed approximately 324,000 tonnes of ore at an average daily rate of 3,340 tonnes per day during the quarter. At the end of the quarter, our stockpile contained approximately 30,300 tonnes at an average grade of 7.6 grams per tonne. Average head grade of ore milled was 10.4 grams per tonne, and average gold recovery was 86.8%, which is higher than recoveries achieved in the brief operating period prior to suspension of operations. We continue to make changes in flotation and gravity to improve recoveries. Total gold production was 94,250 ounces in the third quarter, of which 66,790 ounces were produced in concentrate and 27,460 ounces as dore. Total gold production for the first 9 months of the year is 145,570 ounces. Across the board, Fruta del Norte has exceeded our operational expectations, thanks to the great work and dedication of our team during very challenging times. The health and safety of our personnel on site is, of course, of paramount importance. And we continue to follow stringent procedures to minimize the impact of COVID-19 on the workforce. To date, only 34 cases were identified at site with no known active cases since early August at site. During the quarter, there was one lost time incident and 2 medical aid incidents. The total recordable incident rate for the first 9 months of the year was 0.51 or 200,000 hours worked. In October, as many of you know, a public bridge over the Zamora River collapsed with no reported injuries. Lundin Gold has been supporting the affected communities through assistance with transportation of people and supplies and has reaffirmed its commitment to fund the replacement of the public bridge to be constructed under the authority of the provincial government, estimated at $3 million. Following the collapse of the bridge, a group of local residents erected a blockade on a public road used to access Fruta del Norte. A resolution was reached through the efforts of the company and the national government and the blockade was removed 16 days later. During the blockade, our team demonstrated great resilience, and we were able to maintain operations. Plans are in place to catch up on concentrate shipments over the next couple of weeks. The company's operating supplies, which built up at yards in Zamora Chinchipe and at the port during the blockade, have enabled restocking of the operations to occur quickly once the blockade was lifted. The blockade was led by a group of opportunistic individuals and does not reflect how the greater community feels about us and our operations. Now I'd like to turn the call over to Alessandro for a more detailed look at the financial results. Alessandro?
Thank you, Ron, and hello, everyone. Fruta del Norte has proven it is a low-cost producer. And I am happy to say that we were able to achieve positive cash flow from operations during our first full quarter of production, while building up working capital to steady-state levels for operations, specifically finished product inventories and trade receivables. Cash operating costs and all-in sustaining cost per ounce of gold were $632 and $728, respectively, for the quarter. We calculate these non-IFRS measures based on gold ounces sold. In 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 Ron alluded earlier on, the strong financial performance is a direct result of the great work of our employees in preparing the plant and the mine for the start of operations and the high grade of ore mined during the quarter. In the third quarter, we recognized gross revenues of $123 million based on sales of 62,160 ounces at an average realized gold price of $1,986 per ounce sold. Net of treatment and refining charges, revenues were $119 million. Sales were comprised of 46,041 ounces of gold in concentrate and 16,119 ounces of gold in dore. In accordance with long-term contracts with our customers, gold dore is sold after it is refined. And concentrate is sold at the time it is loaded for sea transfer to smelters on container ships that leave the Port of Guayaquil in Ecuador. It takes anywhere from 2 to 4 weeks from the type of production for dore and concentrate to be sold, and therefore, revenues to be recognized. Finished product inventory at site or in transit to the refinery or to port, as applicable, accounts for the difference of approximately 30,000 ounces of gold between ounces produced and ounces sold in the quarter. Income from mining operations for the quarter, that is our operating margin for gold sales after accounting for operating costs, royalties and depletion and depreciation, was $62.8 million. Effectively, in the third quarter, every ounce of gold contributed approximately $1,000 towards our bottom line. After deducting corporate, exploration and finance costs and derivative losses, net income for the quarter was $27.8 million. A reminder regarding our derivative loss of $18 million, it is not a finance cost and non-recurring cash cost. Rather, it's the result of the application of complex accounting principles to the portion of our long-term debt that is gold prepay and the stream accounted at fair value. Excluding the impact of derivative losses, our adjusted net earnings for the quarter were $45.8 million or $0.20 per share. We generated cash flow from operations of $23.4 million or approximately $0.10 per share. As I said earlier, given that we were in our first 3 months of production, in the third quarter, we saw the build up of operating steady-state levels of finished product inventory and trade receivables, with the resulting impact on revenues, net earnings and cash flow. Going forward, on the basis of relatively consistent production and sales on a quarter-over-quarter basis, we do not expect future fluctuations in finished product inventory and trade receivables to have the same level of impact on earnings and cash flow from operations as they did in this last quarter. In the quarter, we also made scheduled principal and interest payments under the stream facility and interest payments under the senior debt, totaling $11.6 million and spent $14 million on capital, mainly on the South Ventilation Raise and the paste plant, which are the remaining scope of work projects of the construction of Fruta del Norte. I would like to end by highlighting our strong financial position after only 3 months of production. As of September 30, 2020, the company had cash of $68.8 million and a working capital balance of $31.2 million. It should be noted that quarterly payments under the senior debt in the gold prepay facility are starting in December 2020. Therefore, current liabilities in the calculation of working capital included and reflect $168 million, representing a portion of long-term debt due over the next 12 months. Based on our forecast future production and the current gold price, we expect to be generating cash flow from operations well in excess of these long term obligations. I've already talked about the increase in inventories and trade receivables. Two other elements affecting our working capital are VAT recoverable and advanced royalties. VAT charge on good purchase since the beginning of 2019 is recoverable and can be applied as a credit against other taxes payable on a basis proportional to our export sales. As the company is generating sales, these credits are now expected to start next year. Therefore, a portion of the VAT recoverable has been classified as a current asset based on the company's assessment of the estimated time for processing current VAT claims and forecast sales over the coming months. Advanced royalties are credited against actual royalties payable to the government of Ecuador over time based on a specific formula. The company paid a total of $65 million in advanced royalties between 2016 and 2018. As the company is now operating and royalties on gold sales are therefore new, a portion of the advanced royalty payment is now classified as current based on forecast sales and the related royalty is payable over the next 12 months. A more detailed discussion of our financial results is 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.
Thank you, Alessandro. In addition to achieving a successful quarter of operations, Lundin Gold received a long-awaited permit for drilling its top priority target, Barbasco, located 7 kilometers south of Fruta del Norte, along the 16-kilometer long Suarez Pull-Apart Basin structure. We are excited about the blue sky exploration potential this target has. It has similar structural location and orientation with the base edge of Fruta del Norte as well as similar surface expressions. We had hoped to start drilling this year, but the program has been delayed due to COVID-19 considerations and a need to build a separate exploration camp versus supporting the campaign out of Fruta del Norte. Drilling is now planned to get underway in early 2021. We have also commenced a 10,000-meter underground drill program, targeting expansion of the Fruta del Norte mineral resources. There are a few construction projects that are still underway. I've already spoken about the South Ventilation Raise. With regards to the paste backfill plant, commissioning of the plant is complete, and the plant has been handed over to operations. Ramp-up of operating time is ongoing and full production is planned for the fourth quarter of 2020. We also expect to restart construction of the company's Zamora River bridge in the coming weeks, following implementation of stringent COVID-19 protocols to minimize health risk to the nearby communities. Due to the failure of the Los Encuentros bridge, we will try and accelerate the construction to complete the bridge sooner. Construction teams are now mobilizing and based on current plans, the bridge is expected to be completed early in the second quarter of 2021. Our initial internal throughput expansion study has confirmed the technical feasibility of increasing throughput in the plant from 3,500 tonnes to 4,200 tonnes per day. Preliminary engineering is underway, and we anticipate releasing additional information about this project in the coming weeks. The internal preliminary study indicates that a low-risk and low-capital expansion is viable before the end of 2021. We are also in the process of updating the life of mine plan for Fruta del Norte. We expect to release this news before the end of the year. Because of expected lower run-of-mine ore grades and slightly higher operating costs in the fourth quarter compared to this last quarter, we are maintaining our original guidance with respect to production and all-in sustaining costs for 2020. Gold production of Fruta del Norte for the fourth quarter of 2020 is estimated to be in the range of 60,000 to 75,000 ounces, with total 2020 full production estimated to be between 200,000 and 220,000 ounces. All-in sustaining costs for the second half of 2020 is still expected to range between $770 and $850 per ounce of gold sold. Finally, I would like to take this time to thank the Lundin Gold family. We would not have been able to achieve our results without the dedication of everyone at site, and I would like to thank all of our employees for their continued hard work and being diligent in their safety protocols. Chris, I will now open -- that concludes our discussion, and I'll now open the call for questions. Chris?
[Operator Instructions] Your first question comes from Bryce Adams, CIBC.
The first one is just on surface stockpiles, Ron. Looked like there's a little bit of drawdown in the quarter. Do you know what the tonnage of the stockpiles and the grade would be at the end of quarter?
At the end of this past quarter, Bryce?
Yes or even up-to-date now, if you have that available?
No. At the end of this past quarter, it was just over 30,000 tonnes at about 7.6 grams per tonne. It was a little bit lower grade but we had some development ore that was there, but that's where we were as of the end of the quarter.
Okay. Got it. In the disclosure, you talked to the tailings dam lift that began -- commenced in September. Just wondering how big this dam lift is and if that's going to go into next year at all.
Yes, it's a lift of 5.5 meters, Bryce, total. And it did start in September. We were delayed a little bit due to the blockade because we did get a little low on cement. So we did put that on hold. But we're catching back up again, and it was planned to go in to be completed in Q1 of next year. And March is the current completion date.
Got it. You talked about the favorable ground conditions and reconciliation in that regard. I was just wondering about how the block model has been reconciling in terms of tonnes and grade in the last quarter and maybe just year-to-date as well?
So far, Bryce, it's been a good reconciliation with the block model. Obviously, as always, there has been some adjustments that we made as we've got there. But overall, it's been a good reconciliation to the block model.
Okay. And last one for me. Sorry if I missed it in the disclosure. Just wondering if you had any information on the unit cost per tonne for underground processing and G&A.
The -- I know our underground costs, we're running at about $50 -- a little over $50 per tonne mined. So we were doing well there. I'd have to dig in and I'd have to -- we'll have to follow-up with you, Bryce. I don't have them right at the tip of my fingers right now, the dollars per tonne on milling and G&A. Alessandro, do you have those numbers?
Not from the top of my head.
Okay. But no significant variances from what you expected in the technical report?
No, actually, we were under budget, Bryce.
Your next question comes from Terrence Ortslan, TSO.
Ron, congratulations again to you and your team for the low incident rate of 0.51 for the hours at work and performed. Ron, a couple of questions, suppling up to previous question on the underground. You're saying that you're going to be having more long-hole stopes than the drift and fill. What would be the delta on that, on the cost per tonne? And number two, what percent of the ore being drawn do you see from the long-hole stoping versus the drift and fill going forward?
Yes. Terrence, it's a -- thanks for the comments and I appreciate the kind words. With regards to the cost per tonne, I think it was about a $15 to $20 cost per tonne reduction. It was significant. In terms of overall, this is only one of the high-grade drift-and-fill areas that we've been able to convert. The other drift-and-fill areas that were still part of the original mine plan are deeper down. And we probably will be able to drill those, I would say, early next year to determine whether we can convert those as well. So we're kind of doing it as we get there as to whether we can convert. So we still have a -- I wouldn't say it's a significant example. But we still do have some drift and fill on the mine plan [ storage ]. We're just going to take it step by step.
Okay. Just on the mill performance so far, you're taking -- you'll be taking another shutdown, I think, on the maintenance shutdown in the fourth quarter, as you said. How do you see the mill availability going forward as is now without the increased tonnage?
This shutdown, actually, we called it a maintenance shutdown, but it was actually to get some further improvements that we wanted to do. We've added a couple plates to our concentrate filter press to give us more capacity there because we are seeing that we are able to produce more concentrate. So that was a bit of a limiting factor, so we replaced those 2 plates. And then we're still making some changes, Terrence, in trying to improve recoveries around the gravity circuit. So it was only about -- it was a total of a 4-day shutdown. But we -- these are just things that we continue to try to look for opportunities to optimize the existing plant, let alone the opportunity that we see to expand it to 4,200 tonnes per day.
Okay. Just the grinding, the front end of the mill grinding circuit, you're not going to be touching a lot in terms of the tonnage being gone up? It's going to be the tail end? Or where is the -- where do you expect tonnage to bottleneck before you take the...
There's no changes to the -- yes, there's no changes to the front end of the circuit plan, Terrence. So that side of things, we're in good shape. The ore is a bit softer. And yes, no, it's -- we're in good shape there.
Okay. One other question. 10,000 meters of drilling for the underground in the press release, you said, is for the resources. But you're also talking about the expansion. That program is -- will it take place over the next 6 to 9 months? Or is the completed year next year? 10,000 meters?
That 10,000-meter program, it's kind of -- we're doing a bit of expansion as well as infill drilling. So it's bit of a mix, and it's -- right now, it's planned to go through a good chunk of next year's -- well into Q4 of next year.
Okay. And the recovery end of it, sorry, I thought I missed that. The recoveries, are you satisfied with the recoveries you got so far with the completed feasibility technical report? Do you see any improvements over there going forward, please? Mill recoveries?
Recoveries. On mill recoveries, no. We're still not satisfied. They're better. The work we did during the suspension of operations helped improve it, we estimate, about 2 percentage points. But we still got work to do. And so we're still not happy and we still keep pushing to try to get our recoveries up to our design levels, which were between 91% and 92%.
Your next question comes from Kerry Smith, Haywood Securities.
Ron, I'm sorry. Just wanted to clear, what is required for the plant expansion to get to 4,200 tonnes a day? Like you say the front end doesn't need any modification. So is it just tankage and pumps and flotation then?
Yes. That's more what I said and probably addition of another concentrate filter press. We expanded the current one we have, but it's going to be at [ limit ]. So we're going to have another filter press, Kerry. That's about it.
Okay. And can you give a rough idea as to what the cost might be for that expansion? I guess it's going to be less than $10 million. Would that be fair?
Well, no, it's -- we're still working through that. There's -- and also, there's one additional mine truck as well that we need to buy. And so -- sorry, actually 2, one that we've already put a purchase order in for and another one in 2020. Next year, we buy so 2 mine trucks. So we'll have the full details, Kerry, coming out here in the next few weeks.
Okay. So we'll get those details before the year-end, you said, right?
That's our plan, yes.
Okay. And when you do the changeover to incorporate the mill expansion, it sounds like you're not expecting much disruption to the plant throughput. But what -- how should we think about this? Is there maybe a week of lost production while you tie everything in? Or would it be less than that or more than that?
We think it's going to be really be no impact at all because it should keep the mill running. The way we're -- the very preliminary look at the way of laying out and adding the equipment should have no impact at all. It will be a very short time.
Okay. Okay. And to get the recoveries up to the 91%, 92% level, is it only the gravity circuit that you're focused on now to try and pick up that incremental, call it, 3% or 4%? Or are there other things that you're looking at doing as well?
We're looking at everything, Kerry. We're bringing -- we're sending some material out for further test work. So we're looking at everything. We're even playing a little bit with grind size. So it's the entire circuit. We just keep tweaking and looking at opportunities to try and bring that recovery up.
Okay. And what would your expectation be that you could get to that 91% or better like in the next 12 months? Or is that -- is it a longer-term target?
No, I think we should be able to get there in the next 12 months. Obviously, we're trying to do it sooner, and we have had some that average at 86%. But we have had better days too, and we just keep tweaking. You've got to remember, the plant we started processing ore in November last year, so we have ramp-up. And then we really had -- we've only had a few months of where we're running full on. So it's still a new plant.
Right. And Ron, is it one ore type that's causing the lower recovery? Or is it across the board for all the ore types that you see, and it's just really tweaking the plant and doing these modifications?
It's the last -- it's the latter, Kerry.
So it's a [indiscernible]
It's -- yes.
Your next question comes from Trevor Turnbull, Scotiabank.
You did mention some of the things were related to the expansion and the addition of perhaps one or 2 mine trucks. Does that mean that the size of the workforce doesn't really need to change? Or is that not quite correct? Do you have to add a couple of crews to be able to keep up with the number of stopes that you're going to want to have open?
Trevor, that's a good question. No, the mine will see some increase in manpower, but only the mine. The rest of the operation, we don't really see a need to increase.
Okay. And then just switching gears a little bit. You mentioned having the new mine plan out sometime next year. And then I know Terry was asking you about some drilling and infill and so forth. Are you expecting to be able to update the resource in any significant way between now and the new mine plan, other than obviously, factoring in the dilution -- or the depletion that you've experienced?
Well, our mine plan actually, Trevor, will be out this year. We plan on issuing it in Q4, this quarter. In terms of a new resource and everything, it's just going to be a case of -- the first one will be a case of just taking into account the depletion and any modifications we've seen to the resource model by being underground now. But in terms of the ability for the drilling and that, probably that will be later next year.
There are no further questions at this time. Please proceed.
Okay. Just to answer Bryce's question. Bryce, our operating cost per ton milled was running in the last quarter about $127 a tonne. Of which, the mill was running around $30 a tonne, not too far off what was forecast. And G&A was running at about $46 a tonne. And then you have -- we accrued transport in that number as well too. So all in, about $126 a tonne per tonne milled. Okay? If there's no other further questions, operator, on behalf of Alessandro and I, thank you, everybody, for participating in the call this morning. And as always, we are -- Alessandro and I, through Sabina, we're always open for questions if there are any further questions. And again, thanks to the team here at Fruta del Norte for getting us back up and running after a 3-month suspension in COVID, for the team to be operating essentially COVID-free now for several months and to showing the resilience to keep this pace going through a 2-week blockade. The team showed a tremendous amount of resilience. And now we look forward to talking to everyone again after our year-end results are out. Thank you. Thanks, Chris.
Thank you. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.