Q2 2022 Alamos Gold Inc Earnings Call
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[music] This conference is being recorded.
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Please standby your meeting is about to begin.
Good morning, I would like to turn the meeting over to Mr. Jamie Porter Chief Financial Officer. Please go ahead.
Thank you operator, and thanks to everyone for attending Alamos second quarter 2022 conference call.
Addition to myself, we have on the line today, both John Mccluskey, President and CEO and Peter Macphail, Chief operating officer.
We will be referring to a presentation during the conference call. It is available through the webcast and on our website.
Also like to remind everyone that our presentation will be followed by a Q&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 MD&A as well as the risk factors set out in our annual information form.
Technical information. This presentation has been reviewed and approved by Chris Bostwick, Our senior 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 U S dollars unless otherwise noted now I'll turn it over to John to provide you with an overview of the quarter.
Thank you, Jamie and welcome everyone to the call.
I'm, starting with slide three.
We had a good second quarter on multiple fronts meeting our short term operational targets, while also delivering on two key growth initiatives.
Including achieving first production at Lee Aki Grande.
And announcing a larger and more profitable phase III expansion of island gold.
Both have solidified our strong outlook supporting growing production and declining costs.
At the same time as we are growing our production. There. We also expect to reduce our total greenhouse gas emissions as we detailed in June with a 30% reduction targeted by 2030.
Our second quarter production of 104000 ounces of gold was in line with guidance, while total cash costs of $895 per ounce and all in sustaining costs at $1170 per ounce were well below quarterly guidance and substantially an improvement over the first quarter.
This reflected solid performances from our Canadian operations, including a significant increase in production and decrease in costs at island gold as well as a strong start from the Aki Grande.
With production from La Yaqui Grande continuing to ramp up we expect our consolidated production to increase to between 115000 and 125000 ounces of gold in the third quarter.
We expect a further increase in the fourth quarter and decrease in total cash costs, given the Lee Aki Grande is substantially lower cost profile.
We remain well positioned to achieve our full year guidance and production guidance and cost guidance.
Looking at slide four.
Oh, Yoki Grande will be a key driver of higher production and lower costs over the near term Island gold is going to continue that trend over the long term at the end of June we announced the phase III plus expansion of island gold to 24000 tonnes per day, creating a larger longer life.
And even more profitable and valuable operation.
Following the completion of the shaft in 2026 production is expected to more than double from current levels to average 287000 ounces of gold per year with all in sustaining costs.
Through the larger expansion, 43% larger minable resource and lower capital our per ounce costs.
All contributing to a significantly more valuable operation with a 1.8 billion dollar valuation at current gold prices.
Island Gold would not only be a much larger and productive operation will also become a greener mine with the expansion expected to reduce our life of mine carbon emissions by 35%.
To the existing smaller operation.
Moving to slide five this is going to transform island gold into one of Canada's largest and most profitable gold mines.
Following the completion of the expansion of island gold will be the seventh largest gold producer in Canada.
The lowest cost.
And the fifth most profitable.
This is truly a unique asset like young Davidson among the most valuable operations in Canada.
Turning to slide six.
Archie Grande in island Gold are key contributors contributors to our strong outlook with growing production and declining costs, we expect to be producing closer to 500000 ounces of gold per year by next year.
And at progressively lower costs with all in sustaining costs expected to decrease 18% to approximately a $1000 per ounce by 2024.
Following the completion of the phase III expansion, we expect our annual production to increase about 600000 ounces of gold peer with a further decrease in costs.
Lynn Lake remains an important part of our longer term growth strategy with the capacity to increase our production to approximately 800000 ounces of gold per year.
In the near term, we are taking a more conservative and balanced approach to growth by deferring any significant capital on Lynn Lake until the phase III expansion is well underway such that we can fund this growth internally, while generating solid free cash flow over the next several years.
I'll now turn the call over to our CFO , Jamie Porter to review our financial performance.
Thank you John .
Moving on to slide seven we sold a 102200 ounces of gold at a realized price of $1871 per ounce for revenues of $191 million in the quarter.
Total cash cost averaged <unk> 95 per ounce and all in sustaining costs were $1170 per ounce a significant improvement from the first quarter, reflecting higher grades at island gold the strong start at La Yaqui Grande and the weaker Canadian dollar.
As previously guided we expect our second half costs will be lower than the first half with the ramp up of low cost production from La Yaqui Grande being the largest driver.
Operating cash flow before changes in noncash working capital was $85 million or 22 cents per share in the second quarter. Our reported net earnings were $6 million and included a noncash after tax inventory adjustment of $15 million of plateaus unrealized foreign exchange losses of $13 million recorded within deferred taxes, and foreign exchange and other gains of $4 million.
Given the decline in the gold price during the quarter and higher cost them a lot of our review of the carrying value of its leach pad inventory with undertaken which resulted in a $15 million inventory adjustment was the noncash production. Excluding this and other noncash items, our adjusted net earnings were $29 million or seven cents per share.
Capital spending totaled 69 million in the second quarter, including $20 million of sustaining capital $43 million of growth capital and $6 million of capitalized exploration with the wrap up of construction on that phase III plus expansion at island Gold, we expect capital spending to increase in the second half of the year.
We generated 7 million of free cash flow in the quarter, reflecting the strong performances of young Davidson and island gold with a wrap up of production from La Yaqui Grande, we expect stronger free cash flow in the second half of the year.
We returned a record $18 million to shareholders during the quarter, consisting of our quarterly dividends of $10 million or <unk> 10 per share on an annualized basis and $8 million in share buybacks.
We continue to have a strong balance sheet with no debt $122 million in cash $23 million of equity securities and $500 million of Undrawn credit capacity, we are well positioned to fund our internal growth projects, while supporting ongoing 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 eight young Davidson had another strong quarter with mining rates, averaging 8160 tons per day exceeding design rates at 8000 tonnes per day for the fourth consecutive quarter. This drove production a 46400 houses and record mine site free cash flow of $31 million.
Mill throughput averaged 7750 tons per day lower than tons mined due to planned liner changing the mill. This resulted in the stockpile being built up on surface, well, which will be processed in future quarters.
Given the strong overall start to the year costs in the quarter and through the first half of the year remains towards the lower end of annual guidance Young Davidson remains on track to meet its full year production and cost guidance.
Over to slide nine island gold produced 37300 ounces of gold in the second quarter and 52% increase from the first quarter. This reflected higher grades, which stopped averaged 10 grams per tonne and higher processing rates of 1200 60 tons per day.
Costs were also down substantially from the first quarter and consistent with that annual guidance.
The higher production at lower costs contributed to mine site free cash flow $20 million in the quarter.
With similar grades expected through the remainder of the year remain on track to achieve our full year guidance.
Over to slide 10 construction.
Activities of the phase III expansion will continue ramping up through the second half of this year.
We've seen in the photos site clearing of preparation work is well underway and expected to be completed third quarter.
Precinct is expected to begin in August and shaft sinking to start in 2023 with first production from the shop in 2026.
We've made significant progress on the expansion to date with the bulk of the bulk of the earthworks completed a tailings facility already expanded in more than 30% of the project capital already committed.
Combined with the fact that this is an operating mine. This is a lower risk expansion, which is going to create a bigger lower cost operation that will be among the most profitable gold mines in Canada.
Moving to slide 11 production from them a lot of US district totaled 20200 ounces in the second quarter our costs roughly in line with first half guidance. This included 15200 houses from allowed us and 5000 ounces from La Yaqui Grande.
We expect substantially higher production from La Yaqui Grande in the second half of the year stacking rates continue wrapping up.
Consistent with guidance, we expect approximately 65% of full year production from block us districts come in the second half of the year at significantly lower costs.
Moving to slide 12 construction of La Yaqui Grande was completed in June ahead of schedule and total capital for the project is expected to come in at around $160 million.
13% higher than the initial two a 2020 estimate primarily due to scope changes.
This included the decision to build a new crusher instead of refurbishing the auction I think crusher.
The construction of a new cap to help mitigate the challenges with COVID-19.
The early completion of the construction and higher grade stack of one six grams per tonne production of 5000 ounces at total cash costs of $450 per ounce exceeded expectations.
Grade stacked are expected to average closer to the reserve grade of one two graphs for China in the second half of the year.
With stacking rates continuing to ramp up to design rates of 10000 tons per day, La Yaqui Grande is expected to drive significant production and free cash flow growth within the <unk> district.
I'll turn the call back to John Thank you Peter.
That concludes our formal presentation.
I'll turn the call back to the operator, who will open the lines for your questions operator.
Thank you will.
We will now take questions from the telephone lines. If you have a question.
Speaker phone please lift your handset before making your selection. If you have a question. Please press star one on your devices keypad to catch with a question. Please press Star King. Please press star one at this time if you have a question it will be a brief pause to participants can register thank you for your patience.
And your first question is from Trevor Turnbull from Scotiabank. Please go ahead.
Yes. Thank you I just wanted to ask about the Lynn Lake feasibility study that you mentioned.
We'd come out after the U S approval and I was just wondering if we should expect that the feasibility would be coming fairly quickly after that or if it might be delayed a bit given that you also mentioned at the front that you Don.
Don't really expect to commit a lot of significant capital to Lynn Lake until you're further along with island phase III and I just wondered if you would perhaps hold off on the feasibility to keep it as contemporary as possible when you with when you do start spending.
Okay.
Hey, Trevor its Peter.
No. We're we're working in parallel on the feasibility study update sometimes with permitting to get some some commitments that you have to build into it so I could see it.
Picking a bit to work that in but I would think we would look to come up with it in any case as soon as soon as that seems pretty soon after we get to get the permits in place.
Okay, great. Thanks, Peter that's all I had.
Thank you.
Next question is from Fahad Tariq from Credit Suisse. Please go ahead.
Hi, Good morning, Thanks for taking my question, one thing that I noticed it wasn't in the presentation or the press release was talked about inflationary pressures.
And that's positive.
Can you talk a little bit about.
I understand there's some offsets with the higher production in the second half you know.
Island gold grades are doing better than expected, but maybe just talk a little bit about the underlying inflationary pressures. If there are any that you're seeing.
Yeah, It's Jamie here I think I mean across the industry, we're seeing obviously higher higher diesel higher cyanide higher grinding media prices I mean, we've been able to manage the impacts of inflation. This year. We've certainly benefited from the weakness in the Canadian dollar we benefited from some of our diesel hedging. That's in place has helped reduce our <unk>.
Costs by about $20 an ounce.
And you know we have long term supply contracts in place. So we are seeing inflationary pressures, but the facts are the factors that I mentioned combined with the fact that we're bringing on low cost production from La Yaqui Grande has really helped to offset that so we've we're performing well from a cost perspective, we will.
See I mean, you you would expect an inflation in the range of 5% to should be impacting our cost for next year, but we'll look at what we can do we set our annual budgets to mitigate that.
Okay, Great and just a quick follow up one like some of your peers are talking about labor labor inflation and labor tightness, particularly in Canada, just curious if you're.
Also noticing any specific pressures there difficulty retaining employees et cetera.
We have not had any any specific challenges that our operations are I think some of our peers have noted that live with contractors is that that's a challenge and we are seeing that in terms of both.
Contracted underground development and exploration drilling, but overall, it's not having a significant impact on our operations.
Okay, Great. That's it for me thank you.
Thank you. The next question is from Lawson Winder from Bank of America Securities. Please go ahead.
Hi, good morning, and thank you for the update.
I have a couple maybe a few questions. So.
First off on La Yaqui Grande congratulations on getting that started but just.
How have you prepared <unk>.
<unk> for the upcoming rainy season in that scenario.
Yeah, we're almost through it.
Rainy season kind of ends.
Late July early August typically and we've managed through it I mean.
We've we've.
We've put ponds in place you know you have with four running heap Leach operations you have your prey pond, you're you're you're bearing pond and your event. Upon the embedded part is we've got a huge event pause there just just to.
Just to be able to manage that and it'll it'll cover any.
Any sort of contingency that you could imagine with rain. We've also have a big you would've seen out of the picture Theres a large a.
A large heap leach area, there with a lot of plastic down with no or on it yet so we've diverted any water that falls on that around the facility. So you know we're in we're in good shape.
And I.
I mean since you've now had an opportunity to observe the leach pad performed with the rain.
Have you noticed any dilution or the need to use our excess.
Excess cyanide.
We've been producing down there since 2005, you know it's not our first rainy season, and we learned how to manage pretty well from time to time, you'll get a really unusual.
Unusual rainfall that that.
That will happen in one particular day and that that can have a very very short term effect on what we do but other than that I think we've got that rainy season issue well in hand.
Yeah. The other thing is that we're very we're early on in a few places theres not a lot of ore stacked on the pad, yes, not a lot of water to deal with not a lot of solution to deal with it.
It's just starting out so yeah.
You divert all that other water away from you.
Yeah that makes sense, okay. Thanks for that.
You asked about return of capital so.
If I just kind of look.
Return on capital since 2019, it's been quite consistently around 9% of operating cash flow and I just wanted to ask.
How you guys think about capital returns as a percentage of.
Operating cash flow.
As a percentage of operating cash flow I mean, we have targets and we're measured annually by our board with respect to our return on invested capital metrics, but I think.
We've been in a heavy investment pay it phase in there and we're starting to see the benefits of that that young Davidson now and we've had five consecutive really strong quarters were spitting out annualized over $100 million a year.
Actually Grande has got a 60% plus IRR, we're starting to see that.
Those returns coming online now so yes.
Yes, I'd say, we're targeting our increases in our overall capital returns in the years ahead.
But as a percentage of operating cash flow well, we don't we don't we don't specifically pin it to that but for example, we took advantage of a very low share prices to get more active with the share buyback and we've been opportunistic on that front and and so you might see.
Some variability in in shareholder return on that basis alone.
Well when we look at our return on capital metrics, Boston, where we're looking at free cash flow not just operating cash flow.
Okay got it that's really helpful. Okay. Okay. Finally, I just wanted to also ask on Lynn Lake.
So you've delayed literally so is the push out the capex commitments.
So that it can be fully funded internally, which makes a lot of things.
So I just wanted to inquire about your slide that shows gold production growth, which has been like it looks like at full run rate in 2027, which would imply.
Starts with spending in 2024.
I mean and I understand your plate going forward is expected to include some pretty heavy spending on the island expansion. So am I thinking about that conceptually correct. I mean, you said.
My 2024 would be a year, where yeah Ross significantly on the balance sheet.
Yeah, I'll take that no not at all I mean, we were in great shape now now with La Yaqui Grande up and running we should be cash flowing $100 million annually from Mexico, we're getting $100 million annually from Y D and at current gold prices Island funds. The majority of the phase III plus expansion. So we're free cash flow positive net of all the expansion spending over.
The next couple of years, we could easily start Lynn Lake and in late 2020 for early 2025, and finance that from existing operating cash flow. There there wouldn't be a need for us to materially drawdown, our cash balance or or access our credit facility.
So I guess that begs the question I mean could you start even a little earlier like I mean could next year is still be a reasonable timeframe for starting up the spending on Lynn Lake It could be but you know as we've been saying for about six months now our focus is on phase III plus that's the highest return development project, we have in front of us. So we wanted to.
Gone on that and and move that forward before we started focusing on Lynn Lake as well.
Gotcha, Okay, well, thank you very much.
Yeah.
Thank you once again, please press star one at this time, if you have a question.
And the next question is from Kerry Smith from Haywood Securities. Please go ahead.
Thanks, operator, Jamie just on the on the reporting you had to split out and they often Grande this quarter is that the plan on a go forward basis to separate that from from the main pit then in terms of the reporting.
Yeah, Kerry well will affect that going forward.
We did decide to separate separate the physical so I think some of the financial metrics are blended but we do separately disclose our costs on la Yaqui Grande them a lot of I mean, the reality is going forward La Yaqui Grande is gonna be 80% to 85% of our production a mulatto. So it may not make sense to have them separate just given the the mulatto.
Production metrics will be somewhat immaterial, but well, we'll let that back going forward.
Okay, Okay, and with the trucking some of your.
Over to the mill at Y D. From Island can you just give me a rough idea as to what that cost in terms of grams that you did it cost in truck out over there or cost per ton or.
Terry I look at it as a about a gram.
The trucking costs about 60 Bucks a ton to trucking over there so.
You gave up a gram.
On the head grades that you're tracking over there you gain on you actually gain on an operating mill costs, because it's a bigger mill lower cost mills somewhat right and you are but you move cash flow forward.
They're higher cost ounces youre moving that cash flow forward, because we have a we've been carrying a like.
Kind of a two months stockpile of Ireland since we purchased the thing in five years ago, and and the mine is performing well I don't see us in a situation, where you know you're going to have you.
I don't see us in a situation that we're going to wish we had that stockpile in front of that mill at island that mill at Island is is limited from a P.
Permitting perspective to in around 1200 tonnes, a day a bit more.
But it just makes sense to process stuff a bit earlier, if we can.
That's gonna sit on the ground until we expand the mill in 2025, right right and you could then confirm a bigger stockpile away. These wells so that would obviously help.
Yeah.
Yeah, Okay, and just last question I'm not sure if she got her and she's on but you talked about a bunch of drilling that was done on some of the peripheral targets or I'm allowed I was curious sito, but huge telecom west I think there was maybe if you feel even just wondering if in that it was drill programs if you've seen anything like that.
It was interesting how this pilot program is going.
There's lots of really interesting stuff around the glottis district as you know.
It's it's.
The.
Yeah Big land package that we have there and.
<unk> to surprise us. So you know I always say is maybe stay tuned well will you know, we'll we'll put out results from weather.
What do we have something to share the only thing I'd add to that we published that underground reserve is at the start of the year carries a 430000 ounces at four five grams I think there's a there's a potential for us to look to increase the size of that deposit and we're evaluating that in the second half of the year.
And that's part of it right yeah, yeah, yeah, okay. Okay, great. Thanks, very much guys.
Okay.
Thank you.
There are no further questions registered at this time.
This concludes this morning's call. If you have any further questions that have not been answered please feel free.
To contact Mr. Scott Parsons at 4163689932 extension 50 439.
Thank you. Thank you for participating today you may now disconnect your lines.