Aura Minerals Inc

TSX:ORA

Earnings Call Transcript 2021-Q2

[Gabriel Catalani, Investor Relations Officer]

Good morning, everyone. Thanks for joining [indiscernible] Q2 results earnings call. My name is Gabriel Catalani. I'm the Investor Relations Officer. We have together here with us on the call, Rodrigo Barbosa, CEO and President for Aura; and Kleber Cardoso, CFO. We will be presenting those lines. Rodrigo and Kleber will be presenting the slides and commenting. And after the presentation, we will have some time for Q&A session. You can put all your questions that you may have in comments on the shed for Zoom, and we will be answering after all, accordingly. Thank you very much, Rodrigo, you can start.

[Rodrigo Cardoso Barbosa, CEO & President]

Thank you very much, Gabriel, and thank you for all for attending this second quarter 2021 call with all the vessels and analysts. As usual, I will be talking about the highlights of the quarter. And then I will pass the word to Kleber, who will go through in more detail about our numbers. Again, we've shown a very consistent and stable quarter in terms of production and results. This quarter was a lower production and results compared to the first quarter, but that was according to our plan. And then we now see the second semester with a higher production and increase the numbers when we see compared to the first half of this year. And we actually also updated our projections to the year 2021, upgrading some of our production, mainly due to higher copper price that has significantly increased during the beginning of the year. And as we have -- are close to 30% of our revenues coming from copper, that has a significant impact also on our margins.So I will now talk about the highlights of the quarter. And then Kleber will talk about the numbers. Gabriel, I'm having problem here to change it. okay. So in highlights of the quarter. Again, we had a consistent production with the 63,000 ounces, which we had earlier announced. We knew that we would enter in the lower grades in Apoena, slightly lower grades also in Aranzazu, while we are ramping up Aranzazu, and we should come back to higher grades in Apoena during the second half of the year when we reach back again the Ernesto mine, just remind our investors that we reached Ernesto mine by the end of last year, which we had a very strong quarter in terms of production. We're now during the first semester, doing a pushback of the pit to reach back the Ernesto mine now during the third and fourth quarter.Aranzazu, we are glad to announce that we completed the capacity increase by 30%. We reached during the second quarter, already to 100,000 tons per month, and that means that we completed a 30% increase in capacity. And now during the second semester, we will see that fully included in our production and results, combined with slightly higher grades from the mine. Gold Road that it has been challenging, the ramp-up, we had 2 major events that impacted our results. Number one, in order to reduce cost and cash cost at the mine level, we assumed there were mine operation. When we assume the mine operation, we also revealed the schedule of the labor and the time they work, aiming to reduce extra hours that has been paid for them, that was pushing our costs up. That also -- when we did that, some of the employees, as we could see, that was a very help, very glad to make these extra hours they left the company, and then we took a while where we could reengage other employees strain and restabilize the operations at the mine, which is now being very stable. And we will see a reduction also in cash cost already in Q3 and in Q4 due to this change that we made.Second event that happened is that due to the heat wave that reached the West and the midwest of the United States, increased significantly the consumption of electricity. That also provoked some stability on voltage. Unfortunately, some of our transformators has broken up that impacted also all the system of the plant. And we had to -- it took us close to a week in terms of maintenance to turn back on all the equipments. So that also impacted the production of Gold Road that we should -- we do not expect these events to happen again during the Q3 and Q4. While we continue to invest in geology in order to have more confidence about the projected capacity and projected production, combined with also trying to increase significantly the resources of our Gold Road.The combination of lower production and these problems with Gold Road, we saw an increase in cash cost that we knew that would increase also in the second quarter because this mine sequencing, we knew that we would be reaching at lower grades. In terms of EBITDA, we reached $40 million, and that is very consistent to what we were planning, and we expect that to increase now in Q3 and Q4. I would remind that we've been consistently increasing our EBITDA when look the last 12 months, and you should expect to see this consistent increase along the next quarter as well. Net cash up, we reached $7 million of negative net debt of $7 million, even after paying the $60 million of dividends to our shareholders, which means that we've been very strong producing cash flows, and we've been with a very strong balance sheet in order to continue to grow and invest in our expansion plan in a Almas, Matupa and other expansions that we have, while paying our dividend to our shareholders.We -- as I mentioned, we updated our guidance for the year coming from 250,000 to 290,000 ounces. Now we updated this to 264 to and 294,000 ounces, narrowing the gap and also putting a little bit to the higher end, which means that we've been able to not only accomplish what we planned, but also due to a higher copper price also be able to increase our guidance to the -- for the whole year.Almas, we've been finalizing negotiations with the state of opportunities in order to give some other benefits to the state environmental social. That should be finished, I believe, in the next couple of weeks. And once we do so, then we are ready to start. We have all the license and documents in place to start the construction. Just waiting these final negotiations to happen so that we can very, very soon start the construction.Matupa, all the studies that I mentioned to our shareholders is progressing according to our plan. I just remind to all that we already have over 300,000 to 350,000 ounces of our sources, and that is being converted to reserves. We are now doing metallurgical mine design, plant design in order to upgrade that to reserves until the end of the year all the big accounting of these, and we've been very glad to see the first results coming in. But now we will only be able to issue the report by the end of the year in terms of reserves. And then right after our updated feasibility -- pre-feasibility study to the market in order to be able to start the construction of Matupa by the end of next year or early 2023. As a subsequent event, important to mention that we just raised close to $77 million. The use of proceeds is to build Almas or do M&As. We continue to look alternatives in order to grow more than we have in our portfolio. Although very conservatively, we've been taking a very -- a precise analysis in order to do the right decisions when it comes. There's nothing at the moment, but we continue to look in that direction.In terms of safety, I'm very glad to -- we always target a 0 accident. We could reach 0 accident in Aranzazu, 0 accident in San Andres, 0 accident in Gold Road. And totally, we had one last time injury in Brazil, but a very low severity. We aim to have 0, but those numbers shows that we've been increasingly being able to improve our safety standards. And this is a continued, these are non-stop work that we'll always be aiming to have a 0 accident in our operations.About the pandemic, we all have been reinforce in the communication of the importance of the vaccines, when we can help get vaccines we do, such as we did in Honduras. When we cannot -- we help inform the employees, the importance of taking the vaccines, we're very glad we've been able to reach 90% of our employees in Brazil and Honduras and Mexico has been had at least one the first shot of the vaccine in the United States, which has been a little bit more challenging in terms of willing to take the vaccines. We are above 50%, but increasing communication in order to promote a higher rate of vaccination through all our employees. In corporate, we are 100% vaccinated in the United States and very close to that also in Brazil. But in Brazil is just because there is the sequencing by age in order for people to get the vaccine while in the United States, everyone that want to have vaccines already have the access.When we see the production at the line on the chart on the left, we see that we've been consistently increasing the last 12 months of production coming from last -- we finished the year of 2020 with 204,000 ounces produced during the last 12 months, last quarter, 230,000 ounces. In Q1 was 230,000 ounces. Q2 256,000 ounces. That shows that we continue to increase, and we continue to extend that to the next Q3 and Q4, you will see that we are on the way to reach our guidance for the whole year.In terms of production by business, those events at Gold Road impacted our Gold Road is very small compared to the whole portfolio, but that impacted the production of the quarter comes from 4,000 ounces to 3,000 ounces. And as we had -- we reached lower grades, but we should recover some of those grades and also increased capacity will give us room to increase our production in Q3 and Q4. San Andres, we have the -- we are reaching a better grade and also better recovery rates at the mine. Despite the stoppage that we had for closure over 2 -- between 2, 3 weeks, that will impact Q3, not significantly, but will, but we should -- we are doing all the efforts to reach the guidance and significantly increase production by Q4 and in San Andres.EPP, as we knew, we were reaching a lower grade during Q2 coming from Q1, 16,000 ounces to 14,000 ounces. However, now with Ernesto mine in Q3 and Q4, we expect to show significantly increase of progression in the next quarters because of higher grades of Ernesto. Just remind that Ernesto has 2.53 grams per tonne as grade that combined with the other mines while -- that we operate in Q3 and Q4, we'll significantly increase the average grade that we produce in EPP without adding higher costs. So we will see an increase in production, while a significant decrease on cash costs in Brazil. In terms of cash costs, when we compare to the first half of 2020, we see that we've been able to decrease our cash cost along the year. And while when we compare to Q1 2021, we had a slightly increase in cash cost. That came from lower grades as expected in Brazil and Aranzazu and also some -- those problems that we had in Gold Road.About the guidance, I already mentioned, so we are coming from 250,000 to 290,000 ounces, upgrading that to 264,000 to 294,000 ounces. Copper price is also helping us to move in that direction. And that is also impacting, and we should have a significant impact on our margins for Aranzazu during the second half. In terms of cash cost per gold equivalent produced, we come from 2019, $868 per ounce, 2020, $810 per ounce. And then we are now -- if you compare it without Gold Road, we should be on 2021, between $714 million to $787 million so we continue to decrease our cash cost of production. When we put Gold Road that we know that is a mine that we'll start with significantly higher cash costs compared to the mine that we operated, remembering that we bought Gold Road for $1 assume the project financial. And we knew that would be a higher cash cost, higher risk, but we are now doing all our efforts in order to implement our know-how decrease cash cost and also taxes, higher grades and have no events such as we had during the Q2.CapEx guidance, we are updating also on the market. Initially, we were at 93 and $104 million. Now we are updating to $82 million to $91 million. And most of that change come from the delay at least in one quarter to the start of Almas, so that some of the investments that were projected to do this year is being pushed some of them to next year, while we should study construction during now Q3. We were initially projecting to start construction during Q2 2021.In exploration, now we see also an increase, this is due to important and interesting results we've been having in some of our targets. So we have intensified some of the drilling in areas that we find, we think is important so that we can also have good more information to be updated on our reports by the end of the year and sustaining has no significant change. Kleber, if you want to now.

[Joao Kleber Cardoso, Chief Financial Officer]

Thank you, Rodrigo. Good morning, everyone. On the next few slide, I'm going to present a summary on the financial results for the quarter. On this page, we have a summary of our net financial results as we have done previously for the last few quarters in the last 12 months for each of the reporting periods we have on this page. The main message we had a best year as Rodrigo mentioned in the introduction. Is the consistency of our results throughout a more challenging second-party mainly and due to the mine sequence in mine plan. For example, in terms of net revenues, we achieved $112 million in the second quarter of the year. That was pretty much consistent to the revenues, reported in the previous period, bringing the total for the last 12 months to $418 million.In terms of adjusted EBITDA, we are reporting in the second quarter $40 million in adjusted EBITDA. If analyze the last 4 quarters reported, we see the company has been able to keep its EBITDA between 40 and low 50s, despite differences in the mining sequencing and higher and lower grade areas. And we've analyzed the last 12 months, we see a constant increase in bringing the total EBITDA for the last couple months at the end of Q $2 million to $187 million at the end of this quarter.In terms of net income, positive net income of $21 million on the second quarter, it was even an improvement compared to the previous quarter. Although on the previous quarter the company incurred with nonrecurring loss and new cash flows of $8 million for taking off-shot overall. We'll grow that. And with that result, we also seeing the same trend in net income increasing for the last 12 months and every quarter, bringing the total at end of this quarter to $118 million.Finally, in terms of net debt, I -- positive net cash position at the end of the second quarter to $7 million. And we need to remember the second part, the company has some significant cash outflows. Most importantly, the dividend payments of $60 million. We also had capital expenditures of $20 million. Some of that related to the expansion of for our business, as I'm going to explain in more detail in the next few slides and taxes paid out $9 million. That's mainly in Honduras,, where we paid $7 million in the month of April. It's the month where we pay taxes for the previous year.So on this page, we have a bridge explaining the change -- the differences between the adjusted EBITDA and the net income for the reported quarter. The first 3 items here, we have on the left side of the page, amortization of depletion, net interest expense on that in income tax expenses. All the material, they came quite consistent with our expectation and pretty much in line with the results reported on the second quarter of the year. So not being able to mention here. On this quarter, we recognized a $2 million gain related to the Serrote promissory note. Just as a quick reminder, the company has initial condition assets, it's $10 million promissory note that was received as part of the payments of the Serrote project back a few years ago. That asset was not in the balance sheet of the company because it's condition assets. We first recognized a portion of net assets in December last year because the buyers of the project an important milestone, the security of a project finance. And now in June, another very important milestone was achieved. That was the completion of the construction of Serrote and now various tax and operations with that. The chance is that Aura will be able to report the full time report and our amount has increased significantly. So we are recognizing another portion of the assets, and we keep following the development of the project. And now we have advanced up on other items, positive $2 million, bringing the net income for the quarter to $21 million.And then on the next page, on this page, we have a bridge in which we show our changes in the net cash position for the company throughout the second part of the year. So if you look into the far left side of the page, we see the initial cash position -- net cash position for the company at the beginning of the quarter was $62 million. But in the first days of April, RPA $60 million in dividends. So the adjusted initial net cash was close to 0 was $1 million. Then here on the left side of the page, we show an analysis, which we call, adjusted free cash flow to firm. That is basically the cash generated by the minings that are currently in operation, minus the sustaining the CapEx required to sustain those operations in the taxes paid by them. If you look at that portion of the business, the portion of the business generated $18 million in cash in the second quarter.And then on the right side of the page, we have other items such as what our investment for growth is the cash company that is in exploration activities, or developing new mines such as Almas and Matupa or to grow production capacities its existing mines So the cash consumed for these -- those investments were $7 million in the quarter and then we had interest expense is paying these derivatives and other items, bringing the ending net cash position at the end of the quarter to $7 million. I think with that, we end our presentation and we're open to questions.

[Rodrigo Cardoso Barbosa, CEO & President]

Okay. Thank you, Kleber. So I'm taking questions now. First question comes from Daniel Sasson, Itau BBA. And he is asking about the cost of EPP. And he mentions that he understands that the cost has 2 variables pushing up the cost during the quarter. #1 is the mine sequencing lower grades. #2, it's a higher inflation in Brazil. And then he asks, if there's anything that we are doing in order to offset the impact of the inflation? Or if the mine plan, we'll be able to handle that and bring it back to the costs associated with the past results.So yes, as we do always work in Aura, we have the budget. And right after the budget, will build up PMOs in order to put projects to handle special situations and decrease costs all the time. So there is a bunch of activities on the PMO for Brazil in order to reduce costs such as also reviewing contracts, parts and all the way we are purchasing our services and products. We also analyzing other alternatives in order to increase production further than what we have now. So that's also in the plan. Now we don't have yet a conclusion, which we will, as soon as we finalize our studies, we can also disclose in the market, that's been analyzed. But yes, the higher grades of Ernesto will significantly increase the production, and that will have a strong impact of our cash cost. So we should expect to have a significant lower cash cost in Brazil during the next quarter due to the higher grades. And also some initiative that's been taken care right now as we speak, in order to handle some of the inflation that is happening now in Brazil. Anyhow, how we are somehow protected against inflation, higher inflation in Brazil because our products are dollarized. So theoretically, there's a significant increase in inflation in Brazil, sooner or later, that will be translated in the exchange rate, so in dollars, if the real devaluates because of the high inflation, we should have already a lower cash cost in dollars in our operations. But that will depend on how the market will react to the exchange rate and expectation of inflation and interest rates in Brazil. Then he also asks about Gold Road. If we already have a view on the long-term production for Gold Road, that would mean that we will continue to improve our operations. Or if we don't see any improvement on the view of the business, we would just let it go to our debt holders because it's a project finance currently only by the operations. The reason why we did not exercise the right to prepay the debt. It's because we want to have this alternative and be flexible. We continue to believe it's a very accretive project, although we have been challenging operations, but we've been doing a significant amount of geology, and Brazil has been interesting, I would say, we should be publishing until the end of the year. So we continue to believe that this project is accretive. So we are investing time and cash in exploration in order to build up a long-term view for the project, which we don't have yet, but we expect to build up along the next quarters.Second question comes from Conrado, Banco Safra. He's asking about the near mine exploration. If I can give more details, which the assets has been conducted these investments and when we should see the impact in the life of mine?So we are doing exploration near-mine in Aranzazu, intensive also in Brazil. We plan to have updated results by the end of the year, early next year in terms of increase in life of mine. In Honduras, we just started a more surface analysis while drills and more intensified results will come from the results that come from surface analysts and also geophysics.We also have one question here from Yuri XP. He says regarding M&A. Do you still see a big gap between potential buyers and sellers in terms of gold price assumptions? That's a good question. I would remind those that has not been following up on the last 12 months. And last year, we saw a significant increase in gold prices with all the results of the -- impact of the pandemic on the economies. So that also widened the gap of the expectation of price for the sellers and the buyers in terms of gold and also gold assets. So that reduced the amount of M&A during the second semester. What we see now with gold prices more stable, close to 1,800 recently had dropped to 1,700, but now back to 1,750, but that is also giving more stability in terms of projections of gold price and also the expectations of the sellers is narrowing, yes, we see narrowing the gap of the expectation of the price of gold assets, mines and compared to the potential price of the buyers that would like. That's why we've been seeing an increase in transactions and M&A, and that's how we'll be closely monitoring all these movements in order to do a movement when we understand is the best for the company.More questions. Well, there's no more questions. I would just close the remarks. We expect good results for the next quarters. Aura has been able to deliver consistent results. Very important to highlight to have a multi-asset portfolio in difference in jurisdictions, plus copper and gold. The results of this quarter shows that we've been able to have a very stable production results, while we continue to gradually increase production, gradually increase also our margins. Important to highlight second semester, we will have a better production compared to the first semester. We have an increase also projected through 2022. But we all know that we will have the Aranzazu with the full in the year with 30% increase. We have Ernesto mine playing full for the year also during 2022. And now we should also have this increase in grades in Honduras and also repos. So 2022, we should expect a new increase in production for Aura, why we will be building Almas, which will enter production, should enter in production by the end of next year until 2023, we will have the impact of Alma's increasing production, then we will also be able to be building Matupa, so we should see also in 2024, a combination of Alma's and also Matupa on the top of the production that we already have and the increase in some expansions that we already planning. So we -- RI's continue to increase, our production continue to increase our EBITDA, and we should expect to see that along the next quarter as well.So I thank you all for participating here with us. We have open communication with our Investor Relations. So please, if you feel that something has not been answered, contact us directly, and we'll be glad to answer all your questions. Thank you very much. Thank you.

[Joao Kleber Cardoso, Chief Financial Officer]

Thank you.