Aura Minerals Inc

TSX:ORA

Earnings Call Transcript 2022-Q1

[Gabriel Catalani, executive]

Okay. Good morning, everyone. Welcome to First Quarter 2022 webcast from Aura. We have like, the presentation and the results are already available on our website. And we have in here after the presentation you will be able to post your questions through the Q&A panel from Zoom and we'll be responding accordingly. We have together with us, Rodrigo Barbosa, CEO; and Kleber Cardoso, CFO who will be leading the presentation today.

Rodrigo, the floor is yours.

[Rodrigo Barbosa, executive]

Thank you very much, Gabriel. And I'm glad to be here, and thank you all for attending this call. Gabriel, I cannot see the presentation much. Are you sharing the screen? I think we should share with all the audience. Yes.

So I'll go on the first slides as usual. And then give in the whole context of the quarter and how we evolved in many different areas. And then Kleber, our CFO, is going to go through the results specifically from revenues EBITDA and also the profits.

Next slide, Gabriel. So in terms of our overall during the year, we had a very strong result was coming from a combination of few factors. We had sales higher than the production, although the production was slightly lower -- was lower than the last quarter. The sales -- we have inventory from the Q4 2021 that we sold now on Q1. So that combination is plus. Perhaps more importantly, the management has been also able to counterattack to mitigate inflation -- inflationary pressures.

So we did not see on our costs significant increase on -- coming from inflation. The increasing cost that we had was because due to the mine sequencing, we had lower grades in EPP and lower recoveries in San Andres. So that is what drove the cost a little bit higher, but not inflation. So as we move forward to a higher production, mostly on the second semester, then we will also see the cost is going down and offset this increase coming in the first semester.

We had a very strong production again, in San Andres and in Aranzazu. That is the increasing capacity that we did during last year plus more efficiency gains and good grades with recoveries also. That also somehow offset a lower production coming from EPP and San Andres. So a combination of all these initiatives of sales over production. Mitigation of inflation, we had an EBITDA reported at $49 million and then maintaining the level of $180 million -- $185 million, last quarter $182 million of the last 12 trailing -- last 12 months.

In terms of cash as we continue to generate cash in our operations, and despite all the dividends that we paid as the last year we finished the quarter with $194 million and a net -- negative net debt of $29 million, still including the debt from Gold Road that should be unplugged from our balance sheet soon.

Very important other initiative as we move forward during the quarter was the continue on schedule the construction of Almas. We are already 32% the project completely. Most of the engineering, the purchase has already been negotiated, 59% of the budget has already been negotiated. Another 20% should be signed very soon. So that mitigate what we'll be seeing in many different projects. Significant CapEx increase because of inflation. We've been able to mitigate most of these in our internal management initiatives.

Another important step that we did, we do not speculate on gold price even it goes up or down, so we normally don't do hedge. But to guarantee cash flows of products that is being built, we do practice hedges. As I will remind, Almas the payback is 2 years. And what we did is put callers in order to guarantee the payback of this project at the minimum levels that Kleber can go on more details later on. So now 80% of the first 2 years of production of Almas has been handed to callers that goes from around 1,600 to 1,700 on the puts and calls above 2,200. So that gives us a guarantee of the cash flows on the first 2 years, which is necessary for the payback of the full investment.

Another important milestone that we achieved is Matupa. As I mentioned last year, we would -- we were working on having a plan to design 43-101 on X1 so that we could enter in licensing of this project and then move forward into construction next year. Although the life of mine was 6 years only with the X1 deposit, we said let's put this into production as fast as we can. The payback has been 2 years. So it don't need to be further than 6 years while we will still have significant opportunities to increase resources and reserves along with at the same time that we built the Matupa.

And what happened was we started drilling last year on the 10-kilometer alteration at Serrinhas with 10 different targets. The first 2 targets that we start to drill, we got interception of 80 meters at 3.89 grams per ton and 59 meters at 3.14 grams per ton. This opens a completely new perspective for Matupa that initially already had 70% internal rate of return leverage. If we add more resources and reserve, this return is going to be significantly higher if we continue to have positive results.

We also announced acquisition of Big River. It's a company, Australian-listed company that has a project in Brazil and that a combination of Almas, Matupa, and Big River can put us on the path of 500,000 ounces in the next 3 years. So we are growing until 400,000. The current production plus Almas and Matupa will put us on the 400,000 ounces. And Big River can put us in the path to 500,000 ounces in the country that we understand and we are very comfortable with the jurisdiction.

We continue on the finance side. We continue to reduce our cost of financing. We raised a new credit lines of $20 million with cost of 3.70% and 4.99%, below our average cost. So we continue to reduce our cost of capital in order to fund our projects, leveraging even higher at the returns of those projects.

On ESG, we also -- although we are already at low levels of carbon emissions, at the low end on the average, we assume a compromise to have a reduction of 5% by 2023.

Gabriel? So that's an overall of the quarter. In terms of safety, we registered 2 lost time injury employees in Apoena and Honduras. So we target 0 accidents, but we already work under the average of the sector. Nevertheless, we continue to reinforce all our procedures internally to make it more visible and to make more -- bring more conscious of safety to all the employees so that we can reach a 0 accident targets overall the company.

Aranzazu, we did not have any injury this year. Almas construction, we also didn't have any injuries. And then we -- as I mentioned, we continue to improve our standards in order to bring more awareness of safety to our employees and guarantee that we provide the safe environment for everyone that is working with us.

In terms of the pandemic and COVID as we have been able to see all across different countries and also industries, we saw significant reduction on case. We continue to monitor. We continue to test and implement our initiatives. But we don't see -- we see actually a significant decrease on the cases. And we had no impact over our production because of the COVID. In terms of technical structures, the dams -- raised dams, heap leach and undergrounds, we continued to improve our controls.

We have online system implementing how to control the dams also in Brazil. And all of our technical, all of our structures has been monitored as the best practice internationally. We have independent auditors, the safety committee that is monitoring constantly all those structures, and we have no information of any problem in any of them.

So as I mentioned, in terms of production, we had a quarter that we produced 61,000 ounces. This is lower than the last quarter of 2021. And on mining, as most of you know, and especially gold and copper, you have ups and downs according to the mine sequencing. Sometimes you'll reach higher grade and higher recovery areas. Other times, you reach lower grade and lower recovery.

So as we expected, we knew that to the beginning of this year, first quarter and second quarter will be weaker than Q3 and Q4 this year. So we should see increase in production along the second semester. We maintain our guidance to be between 260,000 ounces and 290,000 ounces for the year. And the last 12 months in production, we had the 257,000 ounces. We saw a decrease mostly in EPP again, to lower grades.

So we continue to push back the pit of Ernesto and that we will reach higher grades of Ernesto during the second semester, and we will see then the production coming up as we did during 2 years in the past. Aranzazu continues to perform very well, very stable production. We increased the capacity. We are reaching good grades and good recovery. Management has also been able to execute small actions to increase productivity on the daily basis. In San Andres, as we also expected, we had a decrease on recoveries with a more mix of oxides and a little bit of sulfides that decreased a little bit the recoveries, and we expect to recover and to have a bigger production also during the second semester.

In terms of cash cost, as I mentioned to you, we had an increase compared to last quarter. Those increases came from the lower production, lower grade ore recoveries, not from inflationary pressures. So as we then move forward to a higher production on the second semester, you should see then the cost of -- or the cash costs decreasing in our balance sheet and our results. We reached $818 per ounce. So our guidance is between $771 and $856 is within the guidance, understanding that we expect during the second semester to have a lower cash cost once we reach higher production.

As I was mentioning, I would highlight the 2 projects that we are now developing, Almas in construction. We had 0 accidents. We already have more than 400 employees. We are overall 32% accomplished. So we have 100% of the permits and 96% of the engineered package completed. Procurement of 49% already signed, another 20%, as I mentioned, to be signed very soon already with the prices negotiated on contract only. And construction 10% completed according to our schedule.

So that you'll see, we have achieved offsets on the top. And on the bottom, the civil works at the mill, which is the most important engineering work that we are doing right now and that we guarantee the production to start during the first semester next year, and then production during the second semester next year.

Gabriel? On Matupa, as we -- in parallel of doing the licensing, we released the PEA of this project late last year with a 70% internal rate of return leverage in only 6 years of life of mine, the shorter life of mine, but that's because we decided instead of extending too much in the life of mine before building, let's build the project. The payback is already guarantee with the 2 years with the current life of mine 7 years, while we do in parallel, more exploration in to increase resource and reserves. So what happened, as I mentioned, we had a significantly interception on the first 2 targets in Serrinhas that opens, as I mentioned in the beginning, a very different perspective on this project that will go significantly higher on the 70% internal rate of return if we confirm those deposits to be added on the CS1.

[João Cardoso, executive]

Thank you, Rodrigo. Good morning, everyone. Thanks for having us here this morning.

On the next page, I'm going to go over a summary of the main financial results for the first quarter of the year. So on this page, as we used to bring in and share with you, we have a summary of the main financial KPIs for the quarter, for the very few previous quarters and accumulated last 12 months for each reporting periods. As you can see, net revenues achieved $112 million during the first quarter of the year, bringing the last 12-month revenues to $441 million at the end of March.

As we can see both the number for the quarter and accumulated for the last 12 months, almost consistent a slight decrease compared to Q4. As Rodrigo was mentioning, there was a reduction in inventory during the first quarter of the year. So we saw the benefits in the revenues and EBITDA. In terms of adjusted EBITDA, Aura is reporting adjusted EBITDA of $49 million in this first quarter of the year, coming from $56 million on the previous quarter. But just as a reminder, was the highest adjusted EBITDA in the history of the company, Q4 2021.

When we look into the last 12 months results, we see an accumulated EBITDA of $182 million in the first quarter of 2022. And we see a kind of stability for that indicator for the last 4 quarters. So for 4 quarters in a row, Aura Minerals has reported annualized EBITDA above $180 million. In terms of net income, net income -- positive net income of $39 million in this first quarter of the year as a result of results from operations, but also an important FX gain of $12 million that is related to the strong appreciation of the Brazil real in the first quarter of the year. I'm going to explain next in more detail where it comes from.

And then finally, in terms of cash and net debt, Aura closed the first quarter of the year with a strong cash position of $194 million, coming from $161 million at the beginning of the year. That's also a combination of free cash flow from operations and also FX gains. And in terms of the net debt, also a significant improvement in this first quarter of the year and a negative net debt of $29 million or $29 million, a net cash position at the end of first quarter. And we bring here a pro forma analysis what would have been the net debt at the end of the quarter, excluding Gold Roads. We can see the net debt would have been $54 million. And in relation to Gold Road, Gold Road and the creditor are negotiating, are making progress in the negotiation, and we expect to complete the investments from Gold Road in the short-term in the next month or so.

And then on the next page, we can see a bridge between adjusted EBITDA and net income for the first quarter of the year. As we saw previously, adjusted EBITDA was $49 million in this first quarter of the year. We highlighted the strong performance of Aranzazu, which reported $34 million in EBITDA. On the other hand, EPP came weaker than usual, as Rodrigo was explaining that was expected in part of the mine sequencing. We were already expecting a weaker EBITDA from EPP in the first and second quarters of this year and a stronger second semester. That already was considered for our guidance, that was disclosed earlier this year.

Amortization, depletion, and finance expenses of $9 million and $3 million, respectively, came in according to our expectations and consistent with what the company reported in very few quarters. An FX gain of $12 million, the one we saw on the previous slide, where does it come from -- where it comes from. That comes mainly from cash and cash equivalents held about Aura Almas. As Rodrigo explained before, Aura Almas are made already most of the commitments to build the projects, almost 6% of the CapEx has already been committed and another 20% is expected to be committed in the next few weeks.

So -- and most of the CapEx is in Brazilian reais. Because of that, Aura Almas is holding most of its cash in Brazilian reais. And due to the strong appreciation of the real coming from BRL 558 per dollar at the end of the year to BRL 473 per dollar at the end of the first quarter, we see a gain when we translate that cash from reais to dollars and consolidating our financial statements.

Income tax expenses of $10 million, mainly from Aranzazu, which reported very strong results in San Andres, bringing the net income at the end of the quarter to $39 million.

And then on the next page -- so on this page, we also used to bring to you the analysis and the managerial view of -- with the analysis of the change in the cash and cash equivalents of the company throughout the quarter. As you can see in the very far left side of the page, the bar in red, was the cash position at the beginning of the year of $161 million. Then on the left side of the page, there is one analysis that we call -- what we call the adjusted free cash flow to firm. That is the free cash flow generated by the operations without including investments to grow the company.

That portion of the business in the first quarter generated $26 million. Then more in the middle of the page, what we call the investment for growth, which is what the company is investing exploration to increase the reserves and resources and the life of the mine of the company, in investments, in projects, and mainly in the construction of Almas. That portion of the business consumed $13 million of cash in the quarter. And then more to the right, more financial items like interest expenses paid, these liabilities. We had proceeds from debt and debt payments related to the liability management program, as we present at the beginning, we have been able to reduce the cost of that Apoena with new credit lines. And then we see, again, the FX gain on cash and cash equivalents, bringing the cash position to $194 million at the end of the quarter.

And with this, we end our presentation and open to questions. Thank you.

[Rodrigo Barbosa, executive]

Thank you, Kleber. I already have a few questions here, and I'll start with some questions that is also here for you. The first one is Caio Greiner from BTG. Can you give me a little more color on the $6 million advanced repayment to Trafigura? Is there more to come? So Kleber, you can answer this.

[João Cardoso, executive]

Yes. So Caio, Trafigura is our client in Mexico, who buys our concentrates. Aranzazu received a $6 million advanced payments last year in order to pay a debt with the previous clients. And this advance was expected to be settled with shipments over the third -- with the first 3 months of 2022. So that advance was full paid in the first 3 months of 2022, and we don't -- so answering your question, you're not going to see that in the next few quarters.

[Rodrigo Barbosa, executive]

Thank you, Kleber. There's another question. 2 questions actually that is more related to the cost. [ Andre and Idau ] also asking about the effect of diesel on cash cost. Did the diesel on our cash cost ranges are from 5% to 10% overall, although we've been seeing some increase on diesel, we've been able to mitigate that through a few different initiatives that is already accomplished and few orders that will be accomplishing them to gain productivity and also offset some of those inflation pressure. We don't expect significant higher costs due to inflationary pressure during the next quarter.

There's another question here, about the $25 million in Gold Road that accrued. Is there a forecast when the impact of the net cash that will happen? Is there any risk that Aura will have to pay this amount?

No, there will be no -- there's no risk that Aura will pay this amount. This is a non-recourse project finance that the debt holder understood very well that the parent company would not provide guarantee, but we'll try to make it Gold Road happens. But if not, we would have to stop the amortization, and then we would transfer back Gold Road to the debt holders. So that is underway. As we speak, we expect to finish this transfer holder of Gold Road and together with the $25 million during this second quarter of 2022.

There's another question from [indiscernible]. Most of the companies are paying dividends from Q1 2022. Do you tend to pay more dividends on the short-term as the last one we paid was by the end of 2021?

We have a policy of 20% of EBITDA management current CapEx. We will maintain this policy. We will pay dividends in reference to the results of during the year of 2022. Our policy, it's one payment per year. Although last year, we had excess cash and we consider paying that 2x, we paid on the first semester then we paid in the second semester. We will constantly monitor and see the alternatives to distribute excess of cash during the whole year.

There's another question about Borborema. Once we know that the closing in July and know [ it’s already licensed ] is more advanced in Matupa, it's possible to expect revenue from this project in 2023, if not, in which month of 2024?

We will assess and we will analyze all the reengineering in the project during the second semester this year after we close. And then we will see when we could start the production. Of course, we always try to start construction as soon as we can. If we can start construction in 2023, we would probably do. We would think if we should do at the same time of Matupa or at least have 6 months or 12 months difference from Matupa to Borborema. We will discuss this during the second sem. Start -- Borborema should start bought together or have a 6-month or 12-month delay between them. Those discussions will happen during the second semester and then we announce in the market as soon as we have the decision.

There's another question that we have a very clear target for to reach 400,000 ounces by 2024, but we don't have a clear target for 2023?

We will release the target for 2023 during -- until the end of the year when we release the production process for the following year. Although, next year, we already know that we have production from current operations. And next year, we have a new production coming in from Almas, that start production during the first semester, full production during the early second semester next year. So we will see an increase on our production coming also from Almas.

There's another question here for you, Kleber, from Taylor of Red Cloud.

Could you explain a bit more on the $21 million proceeds from debt for the quarter? What's the usual procedure on this? Also, what's the outlook for recovery of [Technical Difficulty]. Go ahead. There's another one.

[João Cardoso, executive]

Yes. So Taylor, the $20 -- $21 million is -- was raised by EPP. So EPP has close to $6 million in gross debt. And we are under a liability management program to increase the terms and improve the costs. So you saw there was a $21 million proceeds already close to 30 million payments, some more payments are going to come. That's part of the liability management. We're changing more expensive and shorter line for cheaper and longer credit lines at EPP.

[Rodrigo Barbosa, executive]

So there's another question from stock repurchase program. The company has not yet started to repurchase, how is this process going?

We did not start the process of repurchase because we were mostly blackout period since we approved the program. First, we were engaged on the acquisition of Big River and now we had the results to be released. And so we should start the process soon as we move. We clear all this blackout period.

The last question I have here is how do we see extraordinary dividend versus growth equation following the Big River acquisition? Is it correct to assume that the company will only pay minimal dividend back in 2022?

We will access this during the second semester. During the second semester, we'll see what are the optimizations that we can do in Big River, when we could start the construction of Big River, if we do together or we delay 6 or 12 months of Matupa, as you know, on projects Almas and Matupa, has a very short payback. So that it does not consume significant to our balance sheet. So we continue to produce cash even after investing individually in those projects. During the second quarter, we will have to access and see how we would proceed with the dividend and share buyback. Again, if we feel that we have excess of cash, we will pay to the shareholders if we feel that next year the construction of both, if we do both at the same time, we'll consume more of the cash, then we will access. But the 20% of EBITDA minus recovery CapEx is on our budget to be paid during the year.

There's a final question is that you see the whole market is having a decrease on share price and everyone is struggling, but is Aura struggling more than the average of the market? And why do we see this?

We believe that what is happening is more caps, if you compare Aura to other small caps and we've been struggling more than the average of the sector. Most of liquidity went to have people exiting the investments or funds that need to adjust its portfolio, exiting the shares. We struggled a little bit more, but it has gone far beyond the fundamental and with the hope to provide to continue -- we will work to continue to increase our growth. We have more than 50% increase until 2024 with Almas and Matupa.

If you put Borborema in between, we have another -- we have a new 35%, 40% increase. So we are very in line in the best to be at 0.5 million ounces in the next 2 or 3 years. That's what we will focus, producing cash flows growing, in the meanwhile, increase the daily trading volume. We added $2 million per day. We want to be between $5 million to $10 million, that will mitigate significantly this volatility in our shares that we've been seeing during the last couple of months.

So overall, I thank you all for participating on this. Our presentation is on the website, take a look on that. Also, Gabriel, our Head of Investor Relations is available if you have any questions, just message, that we can answer and instruct to you more about our company and details of the results, and also our projection for the year. Thank you very much. Thanks.