Q3 2020 Alamos Gold Inc Earnings Call
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All participants please standby your conference is ready to begin.
Good morning, I will like to turn the meeting over to Mr., Jamie Porter Chief Financial Officer. Please go ahead Mr. Porter.
Thank you operator, and thanks, everyone for attending Alamos third quarter 2020 Conference call. In addition to myself, we have on the line today, John Mccluskey, President and CEO and Peter Macphail, Chief operating officer.
We will be referring to a presentation during the conference call, but it's available through the webcast and on our website I would also like to remind everyone that our presentation will be followed by Q and a session.
As we will be making forward looking statements during the call. Please refer to the cautionary notes included in the presentation news release and Mdna as well as the rest risks factors that out in our annual information form technical information in this presentation has been reviewed and approved by Chris Bostwick, Our Vice President of technical services and a qualified person.
Also please bear in mind that all the dollar amounts mentioned in this conference call are in US dollars unless otherwise noted with that I'll turn it over to John to provide you with an overview of the quarter.
Thank you very much Jamie.
Welcome everyone to our conference call.
We've had an excellent third quarter operationally and financially.
And we have delivered on several key catalysts, which has solidified our strong outlook.
These include the completion of the lower mine expansion at young Davidson.
Let's go to the phase three expansion last school.
The Lucky Friday construction decision.
We produced 117000 ounces of gold at significantly lower costs with each of our operations performing very well the third quarter.
Consolidated total cash cost of $681 per ounce and all in sustaining cost of $949 per ounce decreased sharply from the first half of the year and both were revised.
Below revised guidance.
This reflected a strong quarter and a lot of another record quarter at island gold and young Davidson starting to demonstrate its full potential with underground mining rates increasing as planned.
The strong operational performance and higher gold prices drove a number of financial records in the quarter, most notably record free cash flow of $76 million.
We expect strong free cash flow to continue in the fourth quarter and remain on track to achieve our revised full year production guidance and cost.
Moving to slide four.
Health and safety protocols continue to evolve.
As we look to the best ways to protect our employees their families.
And their communities from the co at 19.
In addition, the strict protocols already in place we are now testing employees for COVID-19 before they start rotations within the tests.
Our island gold and a lot of clients.
The picture on the left shows the laboratory at identical where we're now conducting more than 1300 tests per month.
We're performing a similar number of passing a lot of sales.
These programs are extremely important to ensure we have the ability to identify and prevent the spread of the virus.
Additionally, we continue to support our local communities in area of need ranging from sponsored deals services for our communities throughout the on hold operation.
Displaying medical and safety equipment and supplies to the communities in your model.
Slide five outlines our focus on operating a sustainable business model that can support growing returns to shareholders over the long term.
The completion of the lower mine expansion at young Davidson marked the transition from a reinvestment phase for a period of strong free cash flow generation.
We will take a balanced approach to deploying this free cash flow paying higher dividends strengthening our balance sheet and reinvesting in high return, okay organic growth projects like the ongoing phase three expansion, we Aki Gregory.
At current gold prices I wouldn't golden Molotovs can more to self finance their respective projects.
Allowing us to continue generating strong free cash flow and support higher dividends.
These projects will in turn drive additional free cash flow growth and further return to shareholders that are sustainable over the long term.
Given our strong cash position and outlook, we repaid the 100 million drawn on our revolving credit facility Holger are once again debt free.
Aligned with our commitment to returning capital to shareholders. We were also pleased to announce a 33% increase in our dividend to an annual rate of eight cents per share starting in December 2020.
We have now increased the dividend by 300% to 2018 I believe there is room for further dividend increases to comp.
I will now turn the call over to our CFO, Jamie Porter to review our financial performance.
Jay.
Thank you John.
Moving on to slide six we had the best quarter in the company's history from a financial perspective with record operating cash flow free cash flow and adjusted earnings in the third quarter higher margins at each of young Davidson I would golden Molotovs contributed to record free cash flow of $76 million in the quarter.
I would golden Molotovs, both performed extremely well generating mines like free cash flow of 41 million and $31 million, respectively 41 million of free cash flow at island gold set another quarterly record in fact through the first three quarters of 2020, I legal generated $70 million in mind say free cash flow already exceeding the previous annual record of sales.
5 million generated in 2019.
Mulatto has been equally impressive generating $64 million of mines like free cash flow year to date, a significant portion of that has been driven by Theraclone. A project, we built and brought into production late last year for $25 million in capital.
Highlights the high returns and quick paybacks from these types of projects something we can look forward to with lot Yaki growth.
On a consolidated basis, we sold 116000 ounces of gold at a realized price of $1882 per ounce for revenues of $218 million in the quarter total cash cost was plus 81 per ounce and all in sustaining cost of 949 per ounce decreased 18% and 15% respectively from the first half of the year and we're both.
Below full year guidance.
Lower costs reflected the completion of the lower mine expansion that young Davidson as well as the resumption of normal operating levels that island gold Molotovs. Following the COVID-19 related temporary suspension from the second quarter.
We remain very well positioned to achieve our revised full year cost guidance.
We continue to enhance our health and safety protocols with respect to cope in 19, including testing envelope and I have a goal during the third quarter.
Looking forward, we expect COVID-19 testing and related cost that approximately $25 per ounce to our cost structure in the fourth quarter and into 2021.
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Operating cash flow before changes in noncash working capital improved 63% year over year to a record $130 million or 33 cents per share in the third quarter.
Reported net earnings of $68 million or 17 cents per share included unrealized foreign exchange gains of 11 million recorded within deferred taxes and foreign exchange. Excluding these items, our adjusted net earnings were $57 million or 15 cents per share.
Capital spending totaled $55 million in the third quarter, including $23 million of sustaining capital 29 billion of growth capital and $3 million of capitalized exploration as with the second quarter growth capital spending was focused on completing the lower mine expansion at young Davidson work on the tailings facility that both young Davidson and island gold and other infrastructure.
Our next primarily at island Gold, we expect full year capital spending to be in line with guidance of between 205 in $235 million.
Our next quarterly dividend will be paid in December 33% increase from the previous quarter. This will bring our returns to shareholders to $31 million in 20000 through dividends and share buybacks double the amount returned in 2019.
We ended the quarter with 274 million in cash up from $201 million at the end of June and $40 million of equity securities given our strong free cash flow outlook, we repaid the 100 million drawn on our revolving credit facility in mid October, giving a 500 million of additional liquidity and no debt.
We remain very well positioned to fund our internal growth projects, while continuing to grow our cash position and grow returns to shareholders.
I will now turn the call over to our COO, Peter Macphail to provide an overview of our operations.
Thank you Jamie.
Moving to slide seven.
Young Davidson generated mine site free cash flow of $11 million per quarter from the production of 36400 ounces at total cash costs of $923 per ounce.
Mine site all in sustaining costs of 1100 96 Dolby fronts.
All were significant improvements from the first half of the year, reflecting a partial quarter operating from the new lower mine infrastructure.
Following the completion of the lower mine expansion in July underground mining rates increased in the quarter to average 6700 tonnes per day.
Mining rates are expected to continue to improve along with grades mined and milled.
Production higher in the fourth quarter.
Young Davidson remains on track to achieve its revised annual production and cost guidance.
Over to slide eight.
We are already benefiting from the.
One season of the new lower might infrastructure.
With higher underground mining rates and minus ever achieved and at lower costs.
Migrate increased throughout the quarter and averaged 8000 tonnes per day in September, but the operation benefiting from the significant inventory broken were built up during the tie in.
This demonstrates the expanded capacity at the lower mine infrastructure with its increased skipping capacity and where storage capacity as well as increased automation.
In addition to supporting higher mining rates increased automation productivity and economies of scale and driving costs lower.
We expect mining rates to increase to sustainable rate and 7500 tonnes a day by the end of 2020, which.
Which will continue to drive production higher costs lower.
Combined with lower capital spending we expect this to drive significant free cash flow growth in the fourth quarter and into 2021.
Over to slide nine Island Gold said, a number of new records in the quarter, including record mines like free cash flow of $41 million from record production 39600 ounces.
Total cash costs of $394 per ounce and mine site all in sustaining costs.
$575 per ounce were down, 22% and 17% respectively compared to the same period last year.
Lower costs reflect the higher grade mined and processed during the quarter as well as lower royalties following the repurchase of 3% NSR royalty in March of this year.
In the fourth quarter, we expect grades to return to approximately reserve grade.
I am gold remains well positioned to achieve annual production and cost guidance.
Work on the phase three expansion is ramping up with higher capital expenditure.
Spending expected in the fourth quarter.
Our focus remains on advancing permitting site clearing and detailed engineering of the shaft and associated infrastructure.
Moving to slide 10.
In September we reported the best surface exploration hold today that island gold drill hole, M- 25, or four intersecting 27 grams per tonne cost over nearly 22 meters true width.
Another strong result was from drill hole, MH 25, or three intersecting 14 grams per tonne cuts over 50 meters.
These holes were 100 meters 40 meters, respectively down plunge from the high grade inferred mineral resource block and have true with three to four times greater than the average with the resource block.
These drill results continued to demonstrate the potential for further reserve and resource additions and also support our decision to think a shaft as part of phase three expansion.
Moving on to slide 11.
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Yeah.
The first question is from Fahad Derek from Credit Suisse. Please go ahead. Your line is now open.
Hi, Good morning, Thanks for taking my two questions. The first on capital allocation you mentioned that.
You would like to allocate a third of the free cash flow towards strengthening that strengthening the balance sheet.
But right now there's no doubt the cash balances just shy of 300 million.
What is the goal for the cash balance before maybe consider redirecting, they're free cash flow to the other two buckets. Thanks.
Yeah. Thanks. Thanks for the question, it's Jamie here almost has always been I'd say more conservative than many of her peers from from a balance sheet perspective, and I think it served as well. It's it's physician has to be active in terms of M&A.
When other market participants cat, so we'd be targeting a cash balance of upwards of $4 million to $500 million.
We once we hit that target, we'd start certainly increasing the location to the to the other buckets. If you look at that.
Those priorities third going to growth and exploration spending a third to dividends and other shareholder returns and the third to the balance sheet. Those are kind of long term targets that we anticipate realizing over the next 10 years. So.
So if you look at the current allocation. The next three to four years. The majority of our free cash flow is going to our high return growth projects to the phase three expansion of the island gold to building like Jackie Grande and then eventually to construction of Lynn Lake.
I think beyond that beyond $2025. When you see the free cash flow generation really start to increase in at that time, you'd see a real significant potential increasingly dividend.
Got it that that's very clear Okay, and then the only other question I had was on young Davidson <unk> can you give some color why the Q3 milling throughput was lagging the mining rates I know you said that it's gonna pick up in Q4, and kinda match the mining great, but just curious why it lagged in the quarter.
Yeah, Thanks for the questions Peter here.
The.
The skipping from the mining Q3 was backup loaded too.
Certain extent, so we really.
Mine was really able to to.
Put a lot of tons of the script.
The shaft during kind of the latter part of August and into September. So the mill it ended up being the mill.
Created that stockpile, we'd run of the mill the mill has no problem.
At 8010, a day rate.
For instance in in October were well above that so.
That's why that's why it's leg the mind.
And a quarter.
Okay, great. That's it for me thanks.
Thank you.
The next question is from that Mike Parkin from that National Bank Financial. Please go ahead go ahead and there's no open.
Hey, guys congrats on like a quarter a couple of questions for me.
Power lineup Malaak, those will you be carrying that over to la Yaqui and when would that connection like will that be over there.
In time for first production.
Yes, absolutely markets.
Production doesn't start there until.
2021.
Plenty of time to plan to bring that over.
Early on.
Okay and kind of unpredictable.
If the Capex budget factor that in or would that be incremental correct.
That's factored in.
It's not it's not that it's.
It's about five kilometers power lines and bring it over.
Okay, and then the cost us unless you've provided then I guess already assume that powerline connection.
Correct.
Okay.
And then you.
You've always had kind of a strong discipline bye.
By when prices are low with respect to gold.
What about the thought of you know in this environment selling any assets is there anything within the portfolio that.
Maybe would look to release or is that something that you guys are considering.
This is John Mccarthy I'll answer that Mike.
There are a couple of projects in our portfolio that are are clearly for a small smaller for US now then when.
They were literally acquired.
They're they're decent projects, we continue to work on them and move them along but.
In this market environment as you can well imagine we have.
We have interest inbound interest.
Coming on those projects and.
And we're we're in discussions so it wouldn't be inconceivable, if we if we sold chemicals non-core alka.
Okay Super that's it for me thanks dressing congrats again.
Thanks, Mike.
Thank you. The next question is from Cosmos queue from CIBC. Please go ahead, you're lying is not open.
Thank you, John Jamie and Peter and congrats on a very strong third quarter here maybe in my first question is on young Davidson.
Talk about the throughput underground throughput of $8000 per day.
But then you also talk about general getting to a sustainable rate of 7500 tons per day by year end 2020 can you help me bridge that sort.
Sort of gap.
Like what do you need to.
To do still to kind of get to that consistent right because it sounds like you're already kind of there.
Yeah. Thanks Cosmos.
Clearly the the underground infrastructure, the or 10 waste movement infrastructure is well.
Well capable of 8000 tons, a day and we've demonstrated that you've demonstrated that now.
R R stope sequencing and.
The opening up of areas.
We budgeted to get to 7500 times a day by the end of this year with that ramp up.
And while we were down through it's true the time period that we've set ourselves up to do that and we will continue to ramp that up to 8000 tons of day bye.
<unk>.
Mid ish next year so.
We were able to demonstrate 8000 tons a day in September by drawing down on a bit of inventory that we would have built up through the through the time. So that's.
That's the.
That's the bridge.
For sure and then I guess again L y D.
It'll ask you talked about the throughput at the mill.
Was slightly lower than Q3 do too there's no more stockpiles I know you've talked about matching billing and mining rates.
To the future, but as kind of mining rates go up and if it exceeds your expectations and is there any chance that you might want to build up a stockpile once again or is that not in the cards.
I would suggest that it's rare it's rare that you see a stockpile in front of a mill underground mining situations. It can happen.
And we have one at the end of the end.
Kind of Q3.
Bill has demonstrated in the past 10000 times a day. It has no problem doing 8000 tons a day I think we're sitting at close to 9000 tons a day and.
Through the first three for three weeks.
Of October.
So there's no problem with with the mill, if anybody's concerned about that.
It would hit demonstrated 8000 times a day before we put in a public pressure. So we know in public pressure in there it's not going to have.
Any challenge doing those kind of times, but this mine is a 8000 tons a day or maybe better yet to think about it is a $200 an ounce of year plus.
Producer and.
And that's what it will do going forward.
Okay, and then maybe the last question on here.
Certainly the last several years was focused on the tying up while the underground infrastructure and all the operations and more recently tying up the lower mine, but now that everything's sort of in place and I know in the past.
At a recent exploration has not really been a focus area at least worldwide D.
Is that is that going to change now.
Coming out of it.
John.
I would say.
We're clearly interested in seeing what the further extension potential is.
Two two <unk>, we don't have.
Anywhere near the same sort of.
<unk>.
Need let's say too.
<unk> reserves of ideas as we do see at.
Linda Mulatto square reserve growth is driven by very specific.
Production requirements.
<unk> has 13 years of reserves the way, it's it's right now.
It's.
You are only adding marginal value when you are having reserves that go out beyond 50.
15 years, but having said that.
We have started drilling right again.
As we into the second half of this year, we do have drilling taking place exploration drilling taking place in there right now and.
Going to allocate a reasonably good budget for it for 2021, so I would say going into 2021.
Oh, please on success, you'll probably see.
Additional reserve growth at.
At young Davidson based on that drawing.
Uh-huh.
That's great to hear and those are all the questions I have thanks, John and team and congrats again on a very strong Catherine and stay safe everyone.
Thank you.
The next question is from Kerry Smith from the Haywood Securities. Please go ahead. Your line is now open.
Thanks, operator.
Peter just on why da if I can just kind of maybe ask the question a different way you you and averaged 8000 times a day in September what was the best week, you had let's say on an average.
Just curious how much this mill Kennedy.
The mill.
I mean, we put out 9010 days all the time so.
Yeah.
Okay. Okay. Okay. Okay. Okay. So that's great. So you got all kinds of capacity there and probably.
Probably just assume that's gonna do 8010, a day no problem okay.
The the.
The miners get one chance to Bury the mill and they took advantage of it with some tremendous performance in the latter part of the quarter.
You'll never see it again.
Okay.
And then John just on the.
Portfolio optimization on the non core stuff I'm, assuming that may be S brands and and some of those projects fall into that bucket would you consider today that turkeys at core asset enemy just given the delays you've had there are you kind of thinking that maybe that's something that you may be would optimize out of the portfolio. It's.
Certainly not.
It's not core for example, we acquired to remember in in 2010, when they were exploration projects. We are very successful in that exploration, we built up a fairly substantial reserved there roughly 3 million ounces.
Dot needed quite quite interesting and then when we when we completed the economic studies the.
Straighten it it's very very strong economics and so they.
They were very attractive projects, but between the time that we.
We flushed out those those economics and where we are today, we have since acquired Davidson. We required island go we'd go for our production.
Up over.
Ah run rate of 500000 ounces a year normalized.
And.
And so from that perspective, Turkey, clearly isn't as as core as it as it once was.
And questions have come up over the course of the last few quarters on these calls and at conferences and an investor meetings, and so forth and we've been very candid about the fact that.
We're disappoint disappointed with the delays that we've experienced and.
I don't see things getting any easier in Turkey.
We may very well benefit from from taking on a Turkish partner.
It's no secret that.
We get all kinds of of inbound interest.
On these assets and.
Particularly from.
Turkish mining entity.
And so from that point of view.
Where.
We're going to look as best we can to surface value for those assets.
It's not satisfying at all to us to just sit and wait mode. When we've got a project that's effectively fully permitted and and construction was was underway. We we're four months into construction.
Okay can we stop.
So.
Prince the tuition is certainly not.
Not acceptable.
We're going to do something about it one way or the other and one of the alternatives. We're looking at is.
Taking on.
Party, who would.
Third party would come in at the.
At the project level to partner with Us.
I gotcha, okay. Okay.
Okay. That's great I appreciate that thank you.
Thank you once again, please special star one on your telephone keypad heavy question or comment.
And next question is from downtown Barredo from Canaccord. Please go ahead and he is now open.
Thank you.
John I'd like to continue on the segway carry made into Turkey there.
Has anything changed on the ground regionally in China Cali.
Either for better or worse.
Well things are continually changing in Turkey.
From the probably the most.
Stark change over the last year is the lire has gone from approximately five nine to the dollar two eight to the dollar.
The economy of the <unk> region is isn't really desperate desperate shape. It's it's a region that relies very heavily on on tourism, particularly the capital genetically itself.
<unk> very heavily on tourism and tourism was down drastically this year so.
Yes, the economy is.
Is taking a a real hit the economy of this region is taking a real hit.
So.
There is there is quite a.
Constantly put it.
Very vocal discussion going on there between.
Those that would like to see the project developed and who would benefit from the Johnson.
And.
And supplying Ah.
Substantial business of that.
Of that kind in the region and those who.
We oppose it.
The port the people that supported by and large are those people that are are located closest to it and those that oppose that are are are those from outside and.
It's an old story, and we have seen similar things in Canada.
As we're seeing here in Turkey.
So.
Having to.
Navigate a very tricky.
Tricky waters here and where.
We're doing everything we can to.
To put ourselves in the best position.
To take advantage of of the.
The change in sentiment that I think.
We're starting to observe when I refer to that I mean, there is becoming a lot more.
Interest in seeing this kind of economic activity in a badly badly hit region.
We're hoping that is ultimately going to lead the government too.
The reinstating our mining licences in Malawi, allowing us to get back to work but.
Right now the best thing that.
We can do is be patient that's what the government has been asking us to do I guess, there's a certain point in time coming when we will no longer be patient and at that point, we're going to have to look at.
What our alternatives are not.
Not a good position to be in there, they're great projects, but.
Unfortunately.
We found ourselves just over a year ago put into.
A pretty tough position, where we effectively can't do any work and.
It's.
It's.
It's not something we anticipated and it's not something we're happy with but I think we are.
We're going to see a change one way or the other is coming up over the next six months.
Thank you that's helpful. John would you talk to investors.
This situation.
Do you feel about the situation impairs you at all from an <unk> perspective.
I would say no.
Anyone who has looked at what happened there closely understand that.
Effectively we were we were somewhat railroad.
Ah social media campaign based on a whole slew of of false allegations and that is V.
Very well understood by now by our investors and certainly by everyone inside of Turkey, even the people who did it very well what they did.
And.
That's probably why it just doesn't have the that the power to stick as.
Is.
Is that otherwise would if we were actually guilty of something.
In terms of violating.
Our our permits or doing something.
That.
Would be harmful to the environment I mean, the primary critic.
Criticism that.
That the project development received was the was the cutting down of trees. In this region and of course, all those trees were cut down by the ministry of forests and.
Cut down with the company at all no company has a right to cut down trees.
The government themselves cut those trees the harvested those trees the sold the trees. The kept all the revenue for those trees, we have nothing to do with that in there and this is a very this is an accurate reforested region and our our particular.
Right represented less than 2% of the.
The area of.
Janaka Lee that was that was for us did that year. So it's.
It's really a political situations that.
We're in the middle up there it's.
It's the way of the opposition to attack the government through attacking their environmental policies and and the the tried to make much more of this than it.
Actually was in the the.
Managed to initially gain a tremendous amount of support but all based on false Allen.
<unk> because this is so well understood.
That we are not facing.
A great deal of.
Difficulty from the perspective, if you don't look at the situation carefully if you were to just go online and.
And take your <unk>.
<unk>.
Policy, making our decision making from from what you're reading on Twitter or something like that maybe you <unk> gonna be misled, but anyone who looks into the details of what happened wouldn't wouldn't make a mistake.
That's great contacts thank you and maybe I can just switch gears for one more question a little Lake I understand sanctions still a couple of years away and you're going to the permitting but.
Could you give us a sense for what you would want to see from this project in order to sanction it.
And when we.
As analysts will see an update on the project.
Want to think that Peter.
Maybe I would put it over to Jamie actually okay.
Yeah, No I think we're.
Yo.
The feasibility study that we put out back in December of 2017 on the project had.
But a 12.5% IRR at 12 50 bold bright.
Been working away at it.
From an exploration perspective, finding additional ounces to.
Put into that that that resource and I think we've had some success our goal ultimately is.
To get into about a 15% IRR at.
1300 dollar gold price and I think we're we're pretty close to there. We do have we're spending six $7 million a year on exploration, we have a massive brand package there.
We've had some very encouraging results, we do anticipate being able to expand resources, there and make the project better.
But even at a at a 500 dollar gold price right now, it's got a 22% after tax IRR and at.
Anywhere close to the slot closer to 32, 33% so.
We liked the project.
It gives us the potential to get with 600000 ounces of Canadian production in 2025, when you add little late to what will be producing an island goal and.
The 200000 ounces of year, we will get from young Davidson. So we we do like it would be in a position to make a construction decision the middle of 2022 once once permanent complete and obviously, we would evaluate the the gold price the.
Million dollar FX right.
All the other factors about time before moving forward.
Thanks, do you anticipate putting out a study ahead of that.
We may we may update the study I mean, the the capital. That's that's in our 2017 feasibility study is fully baked there hasn't been a lot in the way of changes to that that we've continued with engineering in further studying those costs. So I don't think there's been a material change on the Capex side.
If we're able to add.
Clearly the resource and then by materially I'm talking about two to 300000 ounces then we consider updating studied certainly.
Great. Thanks, guys. That's all for me.
Thank you.
John is from Steven Cole from that perch, Pershing Global financial solutions. Please go ahead. Your line is now open.
Mr. Gradco. Your line is open. Please proceed with your question.
If you are a new Anucha line. Please.
I think you might have lots of operator, when we proceed to the next caller.
So we have no further question registered at this time.
So this concludes today's morning call. If you have any further questions that not have been and third please feel free to contact Mister Scott Parsons at 4163689932 extension <unk>.
439.
So the conference has now ended please disconnected this time and we thank you for your participation.
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