Lundin Gold Inc

TSX:LUG

Earnings Call Transcript 2022-Q3

[Operator]

Good morning. This is David, and I'll be your conference operator today. At this time, I'd like to welcome everyone to Lundin Gold's Third Quarter of 2022 Results Conference Call.[Operator Instructions]. Thank you. Mr. Hochstein, you may begin your conference.

[Ronald Hochstein, executive]

Thank you, David, and Good morning. Thank you for joining us on this conference call, where Alessandro Bitelli, Executive Vice President and Chief Financial Officer, and I are going to take you through our results for the third quarter of 2022. To begin with, I will go through some key highlights from the third quarter, provide an update on operations at Fruta del Norte and walk you through our strategy as we begin to look towards 2023 and beyond. I will provide some color regarding our ongoing near-mine and regional exploration programs. Give an update on how repayment of our debt is progressing and discuss other growth initiatives in the pipeline.

Afterwards, Alessandro will discuss our financial results in more detail. I will finish things off with my concluding remarks before opening 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 caution regarding forward-looking 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.

For the second time this year, quarterly production has exceeded 120,000 ounces, confirming the continued strong operating performance of the Fruta del Norte mine. In the third quarter, Lundin Gold produced 121,635 ounces of gold and sold 134,640 ounces at a cash operating cost of $656 and an all-in sustaining cost of $807 per ounce sold. Year-to-date, the company has produced 355,190 ounces of gold at an all-in sustaining cost of $785 per ounce sold, putting the company well on track to end the year at the high end of its production guidance of 430,000 to 460,000 ounces. And at the low end of or slightly below its ASIC guidance of $820 to $870 per ounce sold.

During the third quarter, Lundin Gold generated cash from operating activities of $104.7 million and free cash flow of $65.2 million, resulting in a cash balance of $304 million at quarter end. With operations at FDN generating sizable free cash flow and considering the company's cash balance, the company paid an inaugural semiannual dividend of $0.20 per share on September 13 or September 15 for shares trading on Nasdaq Stockholm based on the record date of August 24.

Under its recently established dividend policy, the company anticipates continuing to pay dividends of at least $0.40 per share annually, equivalent to approximately $100 million. Even after the [indiscernible] payment of dividends, we still retain a healthy treasury for other value-generating initiatives, such as our near mine and regional exploration programs, future throughput expansions, which are currently being evaluated, aggressive debt repayments and M&A. As has been the trend, operating results were strong in Q3, highlighted by quarterly gold production totaling 121,635 ounces comprised of 81,607 ounces of concentrate and 40,028 ounces of gold.

Gold sales totaled 134,640 ounces versus 111,605 ounces sold in the same period last year. Gold sales exceeded gold produced in the third quarter because of gold shipments and sales from late June delayed into July due to blockades and some of Ecuador's major highways during a national strike. Line production in Q3 was 377,921 tonnes of ore or 4,199 tonnes per day at an average grade of 12.4 grams per tonne. Consistent with the previous quarter, efforts are underway to reduce your stockpile to minimize oxidation of ore as it affects mill recoveries. On the processing side, the mill processed 379,258 tonnes of ore in Q3 at an average throughput rate of 4,122 tonne per day, slightly below design capacity due to an earlier-than-planned SAG and ball mill relining completed in late September.

The average grade of our mill was 11 grams per tonne, and average recovery was 90.3%. Recoveries this quarter were positively impacted by the higher grade and improved blending strategies put in place to reduce the impact of oxide ore. Operational results in the third quarter were achieved at a cash operating cost of $656 per ounce and ASIC of $807 -- with year-to-date ASIC of $785 per ounce sold, lending gold sits comfortably in a lower quartile of the global ASIC curve.

While inflation is influencing the cost of some of our consumables, such as certain reagents and explosives, we continue to see limited inflationary impacts in Ecuador. Labor represents about 30% of our total costs, and there's still very little wage inflation in Ecuador. Our energy costs are stable at around $0.07 per kilowatt hour since 85% of Ecuador's energy is from hydropower. In addition, our teams at site continue to look for cost reductions and productivity improvements wherever possible.

In the first 9 months of 2022, Lundin Gold has produced 355,190 ounces of gold at an average grade of 10.9 grams per tonne, an average recovery of 89.4%. Grade throughput, production in ASIC have all been strong year-to-date, putting the company firmly on track to meet the [indiscernible], production guidance at lower end of or slightly below its ASIC guidance of $820 to $870 per ounce sold.

Sustaining capital expenditures, a figure included in the ASIC calculation accounted for $91 per ounce sold in the third quarter and will continue to be high for the last quarter of 2022, with completion of construction of the third raise of the TSF and expenditures for other sustaining capital projects, such as construction of a new warehouse and improvements in the sewage treatment plants. Within the scope of sustaining capital, conversion drilling at Fruta del Norte is now complete for 2022 and final results were received during the quarter.

Results from the 18,341-meter conversion drilling program will improve our understanding of the deposit's current geological model by enabling better delineation of the distribution of and controls on higher-grade mineralized zones within a known resource. A new resource model is underway, and the company anticipates updating its estimates of mineral resources and reserves at [ Fruta del Norte ] before the end of Q1 2023.

I'm sure that you are all tired of hearing me talk about [ self-ventilation raise ] and I am so happy not to have to continue to raise it. Following the end of the quarter, we are pleased to announce that the SVR at Fruta del Norte was completed and is now operational. The slots in line of the raise is completed in early October and commissioning of fabs was achieved shortly thereafter.

As a result of the completion of the SVR, ventilation of the mine will increase from 180 to 350 cubic meters per second, resulting in improved efficiencies and enabling mining activities on all levels. Now let's discuss our goals and directions moving forward to continue to deliver shareholder value. For some time now, we've discussed how free cash flow is fundamental to the Lundin Gold story. Lundin Gold generated significant free cash flow in 2021 and is continuing to do so in 2022, with $65.2 million generated in the third quarter and $178.3 million during the first 9 months of 2022.

This free cash flow has helped to build a sizable cash balance of over $300 million, which supports dividends, near mine and regional exploration, capital expenditures to improve efficiencies and further throughput expansions, aggressive debt repayments and other growth initiatives. In September, Lundin Gold paid its inaugural semiannual dividend of $0.20 per share based on the record date of August 24, 2022.

Dividends for shares trading on the TSX and the OTCQX to paid in Canadian dollars, while those trading on Nasdaq Stockholm were paid in Swedish krona. Under its recently established dividend policy, Lundin Gold anticipates continuing to pay dividends of at least $0.40 per share annually, equivalent to $100 million. with the objective of moving to pay dividends on a quarterly basis, possibly starting as early as next year. Based on the current share price and exchange rate, this suggests a dividend yield of over 5%, which is materially higher than the yield seen in the precious metal space.

Funding goal is also reviewing its capital strategy to ensure we utilize treasury as and when needed, while maintaining optionality. This could include accelerating the repayment of some of its current debt, which is comprised of 3 components. The first is the stream credit facility, repayable and variable monthly installments equivalent to the value delivery of 7.75% gold production and 100% silver production, up to a maximum of 350,000 ounces of gold and 6 million ounces of silver. We have the option to buy back half of the stream in June 2024, $450 million and the second half in June 2026 for $225 million. The second is a gold prepay credit facility, which we repaid by June 2025.

The current payments are equivalent to the value of 9,775 ounces of gold based on the spot price at the time of payment. We can pay this down early, and we'll continue to evaluate that option. The third and final deck component is the senior debt facility, which has a remaining principal outstanding of $203 million, repayable at quarterly variable installments and through a cash suite mechanism. Based on our current free cash flow generation, this debt facility would be fully repaid almost 2 years ahead of its scheduled maturity in 2026. That said, management is evaluating payment of this facility sooner or a potential restructuring of this debt facility.

Now let's turn to exploration. Lundin Gold's near-mine program focuses on targets within and around the existing operation to test the limits of the FDN deposit at depth and along the extension of major structures. An exploration data review demonstrated a much wider mineralization footprint around and nearby the deposit itself. Several targets of interest are essentially untested. -- with similar geological conditions of those as FDN and present significant new exploration opportunities. The near mine program has 3 major focuses. -- testing the extension of the FDN deposit at depth to the West and East and the main geological controlling structures hosting the FDN deposit and to the south of the FDN structural corridor, namely Bonza West and Castillo.

The near mine program started in the third quarter of 2022 with 2 rigs testing potential targets, both at depth and to the south of Fruta del Norte. During the quarter, a total of 3,936 meters were drilled across 8 holes. The underground rig drilled 1,953 meters across 5 holes, testing Fruta del Norte's continuity at depth in the southern portion of the mine. All the holes intercepted similar hydrothermal alteration zones consistent with the Fruta del Norte deposit represented by [ specification ]; chalcedony and marcasite, veins and veinlets or branches with different intensities and thicknesses.

Further, 1,983 meters were completed across 3 surface drill holes to test the southern continuity of the main controlling structures of the frigid deposit. Drilling intercepted a wide zone of intense hydrothermal alteration represented by [ specification ], chalcedony, veins, pyrite and marcasite. Results are pending. Drilling is continuing. And based on our results to date, a second surface rig has now been moved from the regional program to the near-mine program to further test the E-structure of Fruta del Norte. During the third quarter, Lundin Gold's regional exploration continue with 3 rigs turning at Barbasco, Capullo and Barbasco Norte. A total of 6,197 meters were drilled across 9 holes. Barbasco Norte, 2 drill holes were completed for a total of 1,327 meters to test a continuous geochemical gold soil anomaly at the edge of the Suarez basin.

Drilling intercepted a narrow hydrothermal alteration zone with a core spread oven and alteration similar to that found in epithermal systems like Fruta del Norte. Barbasco, drilling continued to explore beneath the fixed sequence of finally laminated silica on top of the volcanic rocks in the stove formation, a proximal indicator of epithermal systems. The drill holes were completed for a total of 2,700 meters. Unfortunately, limited hydrothermal alteration was intercepted.

At Capullo, a total of 2,159 meters were drilled across 4 holes. Billing tested a major geological fault associated with anomalous geochemical values for gold and epithermal pathfinder elements in rock samples. The first hole intersected the hydrothermal alteration zone containing a 1-meter brunches or a silica, carbonate veinlets enveloped by a wider 15-meter silica alteration with disseminated sulfides, Other follow-up drill holes intersected narrower zones. Regional drilling is continuing with 2 drill rigs, one at Barbasco Norte and one that will test -- further test Capullo and Cabrado Lanegra. Now I'd like to turn the call over to Alessandro for a more detailed look at the financial results. Alessandro?

[Alessandro Bitelli, executive]

Thank you, Ron, and hello, everyone. In the third quarter of 2022, the company recognized revenues of $210 million from the sale of 134,640 ounces of gold at an average realized gold price of $16.18 per ounce. This is offset by cost of goods sold of $126 million, which is comprised of operating expenses of $76 million, royalties of $13 million and depletion and depreciation of $38 million, resulting in $83.9 million of income from mining operations in the quarter. While quarterly revenues were affected by the decline in gold price, including an estimated gold price adjustment of $10.8 million for sales whose provisional gold price is settled after quarter end. They were positively impacted by the sale of additional ounces produced late in the second quarter but not shipped and sold until the third quarter.

This was due to blockades on some of Ecuador's major highways during a national strike, which ended on June 30. Results in the third quarter of 2022 were slightly lower than the same quarter in 2021, driven by the decline in gold price, partially offset by higher ounces sold. During the same period in 2021, revenues of $191 million were recognized from the sale of 111,605 ounce per gold, which were offset by cost of goods sold of$101 million.

Year-to-date, Lundin Gold has recognized revenues of $605 million and income from mining operations of $278 million from the sale of 35,230 ounces of gold, an increase from the same period last year. With increased production and by controlling costs, Lundin Gold generated free cash flow this quarter of $65 million or $0.28 per share. The company has generated $178 million of free cash flow year-to-date and expect to continue generating free cash flow for the remainder of the year based on its production and ASP guidance. I will now spend a bit of time discussing how net income for the third quarter and year-to-date is affected by the accounting treatment of income taxes and fair value accounting of our debt, 2 items unrelated to our operating performance and strong free cash flow.

Lundin Gold generated net income of $63 million during the third quarter of 2022 and $142 million on a year-to-date basis. Net income this quarter includes a derivative gain of $42 million. This noncash item is the result of a decrease in forward gold price affecting the fair value accounting of our gold prepay and stream debt facilities and should not be factored in the assessment of our operating performance. The MD&A provides a detailed explanation of the impact of the fair value accounting of these 2 credit facilities and the determination of derivative gains and losses.

Other costs deducted in our [ EBITDA ] net income for the quarter, our finance expense of $22 million; income tax expense of $36 million and other expenses totaling $10 million, offset by other income of $5 million. During the third quarter of 2021, net income of $57 million was generated from income from operations of $89 million, and this was offset by a derivative loss of $600,000 finance expense of $11 million; income tax expense of $16 million and other expenses totaling 5 lion.

The increased net servicing costs between the 2 quarters, that is final expense of $22 million compared to $11 million a year ago is the result of incurring a finance charge under the Cordray in stream facilities. The long-term debt note in the financial statement describes in detail the way this cost arises. We expect the finance charge to remain high for the term of the gold prepay and stream facilities at these gold prices. Income taxes of $36 million were accrued during the third period of 2022, which is comprised of current and deferred income tax expense of $15 million and $21 million, respectively, compared to $16 million during the same period in 2021. In addition to corporate income taxes in Ecuador, which are levied at the rate of 2%.

Income tax expense included a 5% Ecuadorian withholding tax on anticipated portion of the net income generated from SDN to be paid in the form of dividends and 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 taxable net income for the quarter. The employee portion of profit sharing payable calculated at 3% of net taxable net income is considered employment and employee benefit and is included in operating expenses. The lower implied overall rate of income tax expenses in 2021 compared to this year was due to the recognition of historic deferred income tax assets, which have now been fully utilized.

When we add back interest, taxes and depreciation and derivative gains and losses, and therefore, exclude the impact of fair value accounting on the debt and deferred income taxes, Lundin Gold generated adjusted EBITDA of $117 million this quarter compared to $13 million in the quarter of 2021. Year-to-date, the company generated adjusted EBITDA of $355 million, again, an increase compared to the previous year. If we look at adjusted earnings, which excludes derivative gains and adjust the offset of the deferred income tax expense, this non-IFRS metric was 20 million $24.4 million or $0.09 per share in this last quarter. On the same basis, adjusted earnings achieved in the third quarter of 2021 were $58.8 million or $0.25 per share.

Again, now withstanding the lower gold price realized on sales in Q3 2022, only partially offset by higher volume of coal ounces sold. The 2 primary reasons for the year-over-year difference in the third quarter adjusted earnings and a finance charge and the higher deferred portion of the income tax expense, as explained a moment ago on the same basis, year-to-date, adjusted earnings amount to $91.4 million or $0.39 per share.

The 2 most significant reasons for the difference compared to adjusted earnings of $0.74 per share last year as a finance charge and a highlife portion of the income tax expense. As of September 30, 2022, lending goal had cash of $304 million and a working capital balance of $254 million compared to cash of $263 million and a working capital balance of $217 million at December 31, 2021.

Year-to-date, the change in cash was primarily due to cash generated from operating activities, net of foreign exchange of $291 million, which includes deductions for cash corporate and exploration costs of $22 million and proceeds from the exercise of stock options, warrants and anti-dilution rights of $9 million.

This is offset by principal interest and finance charge repayments under the gold prepay and stream credit facilities totaling $96 million, excluding associated taxes, interest and principal repayments under the senior debt of $73 million dividends of $47 million and cash outflows of $45 million for capital expenditures, which include cost for the SaaS ventilation rate and sustaining capital. The current portion of long-term debt includes an estimate of the total quarterly principal repayments during the 12 months following the reporting period under our debt facilities.

Once again, a strong quarter for Lundin Gold. We paid our first dividend this quarter. We are quickly repaying our senior debt, and we still have a lot of cash left that can be used to ramp up our exploration programs, facilitate capital expenditures and enable other growth initiatives. The company is performing well, both operationally and financially, and I am confident that we will finish the year at the top end of our production and low end of our cost guidance. For a more detailed discussion on our financial results, I encourage you to turn to the MD&A.

Now I'd like to turn the call back over to Ron.

[Ronald Hochstein, executive]

Thank you Alessandro. Fruta del Norte continues to perform extremely well since commercial operations restarted after the shutdown due to COVID in June 2020 and continues to meet or beat expectations. From this, we are generating significant cash, which enables us to pay a dividend, repair debt with more than enough remaining efforts to look at further growth initiatives. We see growth coming from 3 potential areas: exploration in the form of our near mine and regional programs, further throughput expansions, which we're currently evaluating and M&A opportunities, which we are also actively evaluating. Looking towards 2023, a lot of exciting developments are on the horizon.

We anticipate releasing our 3-year guidance before year-end. We'll be updating our mineral reserves and resources estimate early in the new year, pay our second dividend after publishing of our fourth quarter 2022 results, and we'll be setting greenhouse gas emission targets. Exploration results will be released as they become available. We will also continue to evaluate other potential growth opportunities. It's an extremely exciting time for Lundin Gold, and I look forward to continuing building on and developing from the already strong performance at Fruta del Norte.

With that, I will now open the call to questions. Over to you, David.

[Operator]

[Operator Instructions]. Next, we'll go to Bryce Adams with CIBC Capital Markets.

[Bryce Adams, analyst]

I don't have any questions on the SVR, but well done on that front. Hopefully, the double rent doors in the ramp are now sitting on the surface and getting Rusty -- but the question, production and costs have been tracking positively this year, much better than your original guidance, probably better than the revised higher guidance. My question is, what does this momentum change for your 2023 outlook range? It's been almost 12 months since that outlook was issued. So what have you learned in that time period. Throughput has been good, recoveries are close, but is higher grade is a higher grade profile what we should be thinking about in terms of 2023 and 2024?

[Ronald Hochstein, executive]

Yes. We will be issuing our guidance here in a -- probably in a little over a month's time, price. And -- but as we mentioned to you when we're on the site visit, we are seeing positive reconciliations with the geological model. which is really encouraging. And now with the cells that raised on, enabling us to get into some other areas of the mine gives us a lot more flexibility. And yes, a simple answer to your question is yes.

[Bryce Adams, analyst]

Okay. That's the only question I had.

[Operator]

Next, we'll go to Trevor Turnbull with Scotiabank.

[Trevor Turnbull, analyst]

I had a quick question about, I guess, the debt repayments. You went through a lot of detail on about your cash and what ways you might be using that money. I was just surprised you didn't reduce the senior debt further in Q3. And I just wondered if there was any reason behind that.

[Alessandro Bitelli, executive]

[indiscernible] as the next major payment was in actually Q4. Is that right?

[Unknown Executive]

Also because of the dividends, we didn't -- the sweep didn't kick in. Is that correct?

[Ronald Hochstein, executive]

The amortization of the debt is based on quarterly installments, which are stopped based on the original project finance and production profile from 5 years ago. And in Q3, the schedule of amortization was minimal. It's going to be higher in Q4. So you will see these payments coming through in Q4. The cash sweep for the second quarter or calculated based on the second quarter was 0 because of the significant payments of taxes and -- which are paid annually in Ecuador. And therefore, again, we did not see the reduction in the debt on the payment of the cash sweep in Q3 related to Q2, you'll see that in Q4. Does that answers your question?

[Trevor Turnbull, analyst]

I guess it does. I was just wondering, do you have -- is it possible for you to make discretionary payments even if those mechanisms aren't kicking in given the cash balance you have? Can you just make payments anyway? Or do you really have to wait for everything else to line up?

[Alessandro Bitelli, executive]

The facility allows for discretionary payments, and that is one of the things that we are looking at as well as restructuring of the debt and with discussions with the banks. And then looking at our treasury in different ways in which we can best utilize the retain optionalities as we move forward. And therefore, the repayment of the senior debt would be one of the elements that we are looking at.

[Trevor Turnbull, analyst]

Okay. I appreciate that, Alessandro. My other question might be for you as well. I just wondered if you wanted to -- Ron alluded to being able to maybe accelerate, say, the gold prepaid repayment. And I just wondered if there was any extra costs associated with accelerating those payments.

[Ronald Hochstein, executive]

The cost... Which you're talking about the gold prepay or the stream?

[Trevor Turnbull, analyst]

Prepay, yes.

[Ronald Hochstein, executive]

The gold prepay can be accelerated on the basis of effectively advance the scheduled payments based on current gold prices. And so in terms of the cash flow, that would be the impact... But there's no penalty and say -- the penalties bets essentially just taking the payments and the current gold price of paying it off.

[Operator]

[Operator Instructions]. Next question is to Kerry Smith with Haywood Securities.

[Kerry Smith, analyst]

Ron, you had guided towards lower grades in the second half. So far, that hasn't really been the case. Do you think the grade in Q4 would be similar to the mine grade in Q3 or even the mill grade in Q3, which was actually a little bit less than the mine grade? I'm just trying to get a sense for what you're expecting...

[Ronald Hochstein, executive]

Yes, we still -- we've got stockpiles on surface with great Simon what we mined in Q3, but what we're mining right now and the blend we're putting through is lower grade. So we do anticipate slightly lower grades in Q4, Kerry.

[Kerry Smith, analyst]

Okay. And then you did -- you also talked about one of the options would be looking at mill expansions, which you say you're now looking at that currently. What range of expansions or throughput rates are you considering in those evaluations?

[Ronald Hochstein, executive]

Well, we're looking at just through some very simple debottlenecking being able to maybe add 5% to throughput and then looking at up to 5,000 tonnes a day, what would -- there are a few -- a little bit of capital might be required to get us to 5,000. Those are the levels we're looking at right now.

[Kerry Smith, analyst]

Okay. So similar to what you talked about in late September, the are...

[Ronald Hochstein, executive]

Yes. Not much has changed there. We're still about looking at both those.

[Kerry Smith, analyst]

Okay. And just the last question, how many days of mill production did you lose for the SAG and ball mill reline. So I'm just curious how many days that was.

[Ronald Hochstein, executive]

The team actually did a really good job of 5 days. There was originally -- there was an original 3-day shutdown plan and then expanded to 5 in order to do both mills. But we've -- team has done a really good job. And this time, we actually were able to do both mills simultaneous carry. So that saved another couple of days there. something that found that we have enough space in the grinding area to do that safely. So just 5 days [ rely both ].

[Operator]

Next, we'll go to Anita Sherman, private investor. Here are no response at this time. I'll now turn the call back over to Ron Hochstein for any additional or closing remarks.

[Ronald Hochstein, executive]

Thanks, David. Thank you, everyone, for attending today's call. And look, in terms of news not said while, obviously, we look forward to trying to get some exploration results as those come in and our 3-year guidance before the year-end. So forward to some exciting news and the team continues to keep pushing the Fujita on our cost and production and continue to do a great job. But again, thank you, everybody, for taking the time this morning.

[Operator]

Ladies and gentlemen, that concludes today's conference call. We thank you for your participation. You may now disconnect.