Q2 2020 Torex Gold Resources Inc Earnings Call

Thank you for sending by does this the conference operator.

Welcome to the Nordics Gold resources second quarter Twentytwenty results conference call.

As a reminder, all participants I mean, we spend only mode and the conference is being recorded.

After the presentation, there will be an opportunity to ask questions.

The joined a question Q you mean press Star then one on your telephone keypad.

She didn't need assistance during the conference call you May see got an operator by pressing star ends here.

I would now like to turn the conference over to Dan Rollins, Vice President Corporate development and Investor Relations. Please go ahead Sir.

Thank you operator, and good morning, everyone on behalf of the towards steam welcome to our second quarter 2020 conference call.

Before we begin the presentation. Please note that certain statements to be Nate today, why the management team may contain forward looking information.

So please refer to the detailed cautionary note in today's Mdna.

On the call today, we have Jody Conseco, President and CEO and Steven Thomas CFO.

Following the presentation, there will be a both will be available for a question and answer period.

This conference call is being webcast and will be available for replay on our website <unk>.

This mornings press release and the accompanying financial statements in Mdna are posted on our website and I'd be filed on SEDAR.

Also please note that all amounts mentioned in this call or U.S. dollars unless otherwise stated.

I'll now turn the call over to Jody.

Thank you Dan and good morning to on the line welcome to the torque schooled Q2 results release first time for me and role as President and CEO as Fred Stanford has moved onto the role of executive Chair.

The headlines for the core undoubtedly rates at the operations are back on track with more than 63000 ounces of gold sold in Q2, a strong June as an even stronger July we're feeling confident as we head into the second half of Twentytwenty.

In terms of the agenda for the call I will walk you through a corporate update then the safety and operational performance for the quarter.

Following that Steve Thomas our CFO will step you through the financial results. Finally, I will update you with the progress made against two key catalysts in our near term future building Medio Luna and proving up MCO high.

Starting first with cobot.

The impact of the pandemic was heavily felt during the early part of this quarter.

To create the Mexican government our operations were suspended in April we resumed personal production in may with the processing of lower grade stockpiles and didn't June we resumed fault protection.

In terms of the health of our employees from the very outside we have opted for a staged approach with multiple layers of protection.

This is serving us well.

We have now had four confirmed cases of cope it.

This was expected and continues to be expected.

All cases have been managed as planned. These plans include maintaining our three stage cobot screening for anyone rotating into site.

Rapid response testing on contact tracing.

Isolation as required ongoing and transparent communications with our workforce our union in our communities.

And we have now introduced cobot clearance testing prior to return to work for anyone who has had covis or is showing any called symptoms.

Well, we don't believe that these measures will keep us cobot free for the duration. We do believe that we are very much cobot resistant.

We have set up risk mitigation plans on all fronts that are squarely aimed at enabling us to continue to operate come what may as Mexico continues to deal with a pandemic.

Our disciplined approach to safety at all levels of the organization has made our cold and protocols possible and has made the receptive.

It has also led to furthering our run them no lost time injuries.

As of today are lost time injury frequency said seven zero.

We have operated more than 7 million hours without a lost time injury.

Truly an example of leaders and workers coming together using strong systems to deliver an exemplary and industry leading outcome.

Turning now to production.

What we were not producing in April it was not a wasted month with a care and maintenance team on site, we undertook extensive maintenance and nondestructive testing work at the process plant.

During this period, we found a low speed coupling in the ball mill drive train that required replacement.

The part could only be manufactured overseas and as a result arrived in June and it was changed out in June which explains the lower milling rate for that matter.

In May we resumed personal production.

By processing from the lower grade stockpiles, we produced just over 20000 ounces for that month.

That decision generated sufficient revenue to enable us to stay current on accounts payable and to continue to pair employees.

It also provided us with some important operational insights for the period to come in late 2023 to early 2024, what do we will use the stockpiled material as transitional feed between the conclusion of the LG open pits and the ramp up of many other though.

June was marked by a full remobilization of all of our operating and maintenance crews any open pits and underground.

The pets had an excellent ramp up and delivered 16600 tonnes per day in the month.

Where we contract mine and the underground we had some difficulty in mobilizing out a country workers. This explains the 830 tons per day achieved a person's gets thousand tonnes per day that we had been consistently heading prior to the shutdown.

These personnel issues have now been largely resolved and you can expect that we will return to the usual underground mining rates in Q3.

Mind grade for the quarter came in as expected at an average of 3.07 grams per tonne.

Notably with respect to the underground we made some key decisions in the quarter to continue to optimize both subscale and LD mall deep.

We have started development at Alamo deep to allow for conventional cut and fill mining below the area, where MCO highest being tested.

We have started the development of a third portal, which will daylight near the process plant and is expected to cut our haul distances and half which will have associated unit cost benefits.

We have expanded exploration drilling in the underground at E.L.D. north yield the south and under why has us well. The purpose of this additional drilling is to increase the grade and that pre made it immediately gonna period in the back half of 23 in early 24.

In terms of the process plant I've already touched on the coupling repair it proceeded as planned in June which impacted throughput in the month in spite of the downtime. The team delivered 38890 ounces for the month of June.

Recoveries remained stable throughout the quarter at 89% first as a design of 87.

If there was any question about why do we were truly Bakken stride. The team closed July with a healthy 42630 ounces produced which has an excellent signal that we have put the cold shutdown behind us and have come back with a strong start to the third quarter.

This strong start also positions us nicely to deliver on the revised production guidance of between 390 and 420000 ounces for the year.

Our disciplined and systems based approach to safety and production has now been extended to operating costs.

You know with an opex budget beat and even with the suspension period operating cash flow for the quarter came in at $28 million prior to changes in noncash working capital.

With that preview I will turn it over to Steve Thomas for a detailed review of the financials.

Thank you Jody and good morning, everyone.

Sports interruption for inside of Q2, the key message is that we responded effectively to the more Darwin April and position the operations well to reengage, partially in may and fully injured.

Our balance sheet threw up.

As such towards is well positioned to deliver strong operational and financial results you know it's too.

We expect to carry this momentum into Twentytwenty woman beyond with the price of gold trading around all time highs, we are well positioned to report yet in a strong cash position.

Given the strength of our operation, we will be able to fund our future growth commitments meets our debt obligations and grow our treasury position by the year end.

You may prove may we took the proportionally measurable were $90 million on the revolving credit facility to ensure the liquidity. If the company was maintained given that the duration of constraints on production was on search and that's not taught.

With the operations able to partially Reengage remains fully in June during Q2, we produced 60000 ounces of gold sold 63000 ounces, that's an average price of $1712 per hour.

That's Jody mentioned this results in a $28 million of cash generated from operating activities before noncash working capital.

The non she living dollar increasing working capital can be attributed to the revolver draw for which the increasing cash matches with an increase in long term rather than current debt liability.

The 41 million dollar growth in customs during the quarter reflects the $19 million rule and the revolver facility offset by 50 million dollar outflow across cuff sort of investment scheduled debt repayment.

The casing, but net cash generated from operating activities was more or less flock to $2 million.

Lastly earnings from the mining operations $18 million. This includes $11.1 billion calls associate to cope with 90 related impacts from operations comprising $8 million of cash production cost of $3 million of depreciation.

Both of which all adjusted diluted adjusted earnings.

<unk> million dollar cash production costs, our adjusted out of total cash cost I see an adjusted EBITDA.

So turning first lien through our liquidity position.

I tunes of particular note for Q2, where relevant first half of the year are as follows.

Notwithstanding the $19 million revolver draw mentioned earlier the movement in working capital reflects the continued progress we are making collecting VHP balance seasonally for June which for the quarter was $13 million.

A tax receivable balance of $20 million, representing the difference between tax installments made during year to date and our rest of mid year tax liability.

The reduction in accounts payable and accrued liabilities of $32 million during the quarter reflects primarily the settlement of the twin jumanji liability for the slight based profit sharing plan plus a reduction in trade payables.

Also reflects a further debt reduction about term loan by $22 million.

The aforementioned capital investment of $29 million.

The extent of customer investment you today this things constrained due to the site closure.

As our revised guidance indicates weak, but the amount of deferred stripping to reduce compared to original guidance. However, our sustaining capital program is expected to remain in line with original gardens for non sustaining capital. We have spent $13 million year to date, and they're going to spend $92 million, which.

Joe do you will expand upon shortly.

In summary for our cash flows the first $50 million draw on the revolver paid for Caf two additions are repayment of debt and the second drew were 14 million represents a growth in the cash balance over the period.

Regarding the debt principal repayments $22 million. This sees our outstanding term loan would choose to $87 million.

With 140 million drawn on the revolver results in a net debt position of $54 million at quarter end compared to $26 million. It Q1.

The car bombs that Q2, and it's $177 million.

The production performance achieved during July and elevated so I was surprised the balances grow meaningfully by the end of July.

With this cash position I'm full cost production targets. This leads us confident that the company has adequate liquidity to support its operations and meet its financial obligations over the next 12 months.

But as Joe you mentioned management remain vigilant of the ongoing measures it will take to combat future impacts of Cobiz 19 should they arise.

We reported in Q1 on the significant impact if the 25% depreciation of the peso during March.

Had on the peso currency hedges put in place in Q1.

Q2 was seen a slot strengthening in the peso compared to Q1, resulting in a small unrealized gain across the currency hedges was settled MD $85 million of contracts outstanding at quarter end.

However, the precipitous rising gold price has resulted in a 6 million dollar unrealized loss in the period as we mark to market. The gold callers that are in place you now Rolling 12 month program.

Of course in pushing gold price would impact the future value that's always going contracts.

Turning now to operating costs in total cash cost per ounce.

The significant reduction in production and sales during Q2 and the associated to reduce costs incurred in I'd put it may heavily impacts the TCC and they see per ounce calculations for Q2.

That said, we see that with TCC its $740 per ounce for the quarter and $744 for the first six months and a secret 1000.

The for the quarter a 990, the first six months those metrics for the first half of the full within the range for the revised guidance for the full year.

It's worth mentioning also that the company has not experienced any material elevation in cost of materials as a result of the cobiz pandemic due to the preemptive measures taken by the operations in the supply chain team to ensure that we have access to critical consumer foods in adequate supply.

I'm through those regular channels.

[noise] asphalt costs reported in Q1, the impacting Q2 on the TCC. It makes it calculations in accounting for open pits and opens the underground stockpiles based on ounces rather than on a per ton basis, you should price a twentytwenty.

Has reduced significantly andy's largely in line with our expectation.

Lastly, having taken external surroundings and review treatment by others for Poblete 19 related production cost and depreciation we think it appropriate.

Millions of production cash cost our adjusted out of TCC numbers, which is equivalent to $127 per ounce reduction [laughter] as mentioned earlier. These targeted 19 related costs all fully accounted for within our earnings figure. However.

Turning now to our tax position, which for the second quarter is uncharacteristically straightforward.

Current income tax expense is in respect to the 7.5% mining tax and for the deferred tax liability the slot strengthening of the pace I work for the quarter resulted in a deferred tax recovery.

The above operational performance results net earnings of $3.8 million for the quarter or four cents per share.

Adjusted earnings of derive consistent with previous quarters, the key but Q2 sees the adjustment for the Colby 19 related costs, resulting in adjusted earnings of $3.6 million and similar four cents per share on a basic and diluted basis.

In summary in Q2, we have demonstrated the effectiveness of the measures taken to combat the impacts of posted 90 wells limiting the costs incurred during the care and maintenance period.

Positioned ourselves for rates to to producing to the current high price market, maintaining the custom growth program to set us up for 2021 and beyond and lastly, bolstered our liquidity position to protect the company in the event a future volatility arising due to the pandemic.

Thank you for listening and with that or would turn the mark talked over to Jody.

Thank you Steve.

Turning now to the future with an update on many Atlanta and Mike Hi.

Immediately and other work has been focused in four key areas first the feasibility study.

This continued throughout the common period without interruption and is scheduled to be concluded mid 2021.

Second our infill drill program for this year. It is aimed at upgrading an additional seven to 9 million tons from inferred to indicated this program is suspended for the month of April than me, but we re mobilized in June and drilling resumed in July.

The third area of focus is the seven kilometer tunnel needed to access the media Luna ore body.

This will be color close to our new portal three near the process plant. The platform has been completed we are starting into slope stabilization around the portal finalizing the labor plan and ordering equipment. We're on pace to take the first blast in early Q4.

The fourth area of focus is permitting.

We are on track with three permits already approved including the environmental impact resolution for the Morello property.

Three other permits are pending all in accordance with our permit plan.

One additional point of note on the Medio Luna build as our decision to further de risks schedule by adding a portal at the top of the ore body on the south side of the river.

The Spencer this contributes to the increase you see in the non sustaining capital numbers as compared to original guidance.

Permit applications have been submitted to the south portal and construction is set to begin later this year.

All of that to say our next mine is very much on track.

The seven kilometer tunnel to many alone I will use monorail based trains to remove blasted rock from the tunnel, which brings me to the muck a high update.

Last month, we will start steel testing the equipment for monorail based transport of blasted rock on the steep 30 degree ramps.

We have demonstrated the effectiveness of drilling and bolting on the steep ramp.

With that he couldn't performing as designed we are moving to the next step which is the testing for the efficient removal of the blasted rock.

The steep wrapped conveyor has been manufactured and deliberate to site. We expect to start testing. This later in the year.

Another long haul open stope has been drilled and blasted meeting the specifications of 95% passing 400 millimeters and additional crews are being trained in the use of the muck high equipment and processes. So that we actually have people who are ready to go when we need them.

All in it has been a complex than unusual quarter for Torics and we believe that this was reflected in our valuation during the first half the year.

With a quick return to stable production and cash generation, a healthy balance sheet, the future well on track with many alumina and MCO high and the safety record that is industry, leading we've clearly weather the storm and come out stronger the other side.

Thank you for taking your time to listen in today subject to any questions. This concludes our remarks that I will turn the call back over to Cloudier the operator.

Thank you we will now begin the question and answer session. The joined a question Q you May Press Star then one on your telephone keypad, you will hear a tone and knowledge in your request.

If you're using a speakerphone please pick up your handset before pricing any Keith.

To withdraw your question. Please press Star then too.

We will pause for a moment as callers join the queue.

Once again, if you have a question. Please press Star then one.

Our first question is from Michael Fleet <unk> private Investor. Please go ahead.

Hi, I'm I'm wondering what the.

Milling rate is now since you restart.

The alignment on the mill is a holding.

Yeah. Thanks for the question Michael the milling rate in the month of June was 11, 870, which reflected the 74 hour downtime, we Chuck to change out that comp coupling the milling rate for the month of July was excellent and above 13000 tonnes a day we have.

Completely aligned to both the Sag mill in the ball Mill drive train checked it again during the April downtime and I'm pleased to say, we have no indications that either vibration or temperature are running out of tolerance. So we're in pretty good shape from the knowing perspective.

Do you expect to get up to the 14000 ton rate I believe that's what you were after the last alignment.

Yeah, No we haven't been up to 14000 ton rates really ever in fact, we're limited by power as result of some decisions made during the build our new and revised daily milling gold rates has 13000 tonnes a day and we have every confidence that we will achieve this in the back half of Twentytwenty.

Okay. Thank you.

Thank you.

Our next question is trying to Ryan Thompson with BMO. Please go ahead.

Yes, hi, Jody thanks for the update.

Could you just give a little bit more color or just dig into the decision to your AD the portal on the.

So its side of the river and can you maybe just tie that into a discussion of what the latest thinking is on on the scheduling.

Yeah. Thanks for the question Ryan the South portal came about.

As we were looking at the scheduling for the title excavation for the southern kilometer tunnel.

We plan to use monorail based equipment for that tunnel, we have scheduled a very aggressive rate a 10 meters today, even with the monorail based equipment. There is risk associated with that on our plans that shows us arriving at the bottom of the Mehdi alumina ore body underneath the buses river in about two years.

So what we wanted to do in order to mitigate that schedule risk is a place atop a portal at the top of the ore body on the sell side of the river. We're now calling it the south portal, which will enable us to access the ore body from the top using conventional wrapping to get in there and so with that thinking we have now.

We're past the access that ore bodies. So we can bring production online in 2024 as scheduled.

Okay.

Great. That's a that's very helpful.

That was the only question I had different you guys answered everything else. So I'll turn it over the next caller.

Thank you Ryan.

[noise] for any further questions. Please press Star then one on your telephone.

There are no further questions registered at this time. This concludes today's conference call. You may disconnect. Your lines. Thank you for participating and have a pleasant day.

[music].