NEM Q4 2017 Earnings Call
Operator: Good morning, ladies and gentlemen. Welcome to the Goldcorp Q4 2017 Results Conference Call. Please be advised that this call is being recorded. I would now like to turn the meeting over to Mr. Etienne Morin, Director, Investor Relations of Goldcorp. Please go ahead, Mr. Morin.
Etienne Morin: Thank you, operator and welcome to the Goldcorp fourth quarter 2017 conference call. Before we begin, I would like to remind you that during today’s presentation, we will be making comments containing forward-looking information. I invite you to read this slide, which describes some of the risks and uncertainties that may affect Goldcorp’s performance in the future and as such, actual results may differ materially from the views expressed today. Further information on these risks and uncertainties please consult our most recent MD&A and annual information form. For the formal portion of the call today, we have David Garofalo, President and Chief Executive Officer; Todd White, Executive Vice President and Chief Operating Officer. Also joining us are Jason Attew, Executive Vice President and Chief Financial Officer; Brent Bergeron, Executive Vice President, Corporate Affairs and Sustainability; and Paul Harbidge, Senior Vice President, Exploration. Those of you participating on the webcast, we have included a number of slides to support today’s discussion. With that, I will turn the call over to David Garofalo. Dave?
David Garofalo: Good morning and good afternoon. First and foremost, I would like to thank everyone who is able to join us either in person or through our webcast at our Investor Day last month. We recognized everybody’s busy schedule and appreciate you taking the time to better understand our story. As previously reported in January, we delivered a sixth consecutive quarter of steady and on-target low cost production. During the fourth quarter, we produced 646,000 ounces of gold at all-in sustaining costs of $870 per ounce compared to 761,000 ounces at all-in sustaining costs of $747 per ounce in the fourth quarter of 2016. The production variance comes as expected from Peñasquito entering into a planned stripping phase resulting on lower grade ore being processed and also from the disposition or closure of non-core mines over the last year as we repositioned the portfolio. This was partially offset by Cerro Negro and Éléonore, which both delivered strong quarters as they continue to ramp up towards sustainable production levels. As we indicated throughout the year, we had expected fairly consistent quarterly gold production in the range of 625,000 to 650,000 ounces in 2017. We delivered consistently within that range while maintaining our overall cost in line with our improved all-in sustaining cost guidance of $825 per ounce. Our planned strong performance in the fourth quarter allowed us to achieve our full year production and cost guidance ending the year with 2.6 million ounces of gold compared to our guidance of 2.5 million ounces at all-in sustaining costs of $824 per ounce. Our $250 million sustainable annual efficiency program remains on track, with nearly $200 million achieved in 2017 across our portfolio. We expect to achieve the full $250 million by the middle of this year and with more than 100% of the efficiency of targets identified, the program is likely to be extended. Lastly, if you turn the page on a well executed 2017, we have greater confidence in our ability to deliver on our 5-year 2020 plan. Our on-target project delivery expansions at Peñasquito, Musselwhite and Porcupine underpins our plan for a 20% increase in gold production, a 20% increase in gold reserves and a 20% reduction in all-in sustaining costs by 2021. We have also introduced our Beyond 20/20 program, which is focused on advancing our longer term projects within the portfolio such as Century, NuevaUnión and Norte Abierto. We have committed $100 million in 2018 to advance those projects to the next stage of development and to support continued growth and low cost production from our growing mineral reserves. Turning to the fourth quarter financial results, net earnings for the fourth quarter were $242 million or $0.28 per share compared to net earnings of $101 million or $0.12 per share for the fourth quarter of 2016. Operating cash flows were $511 million for the quarter compared to $239 million for the same period in 2016. During the fourth quarter we saw a significant improvement in value added tax refunds in Mexico and Argentina with approximately $280 million collected during the quarter. In December, Argentina also enacted a reduction to its 35% corporate tax rate, reducing to 30% for 2018 and 2019 with further reductions to 25% for 2020 and beyond. This tax rate reduction resulted in a non-cash deferred tax recovery of $156 million or $0.18 per share in 2017. Looking at the objectives we had established at the start of 2017 not only did we achieve our production and cost guidance, but as mentioned we re-guided our cost down from $850 to enter $825 per ounce. This was probably due to the success of our $250 million sustainable efficiency program, which really took hold this year. We have also shown very good progress at our two major projects pyrite leach at Peñasquito and materials handling at Musselwhite which collectively amount to a little over $0.5 billion of investments in existing operations, tracking slightly under budget and expected to be delivered ahead of schedule. We completed the Century project’s base case pre-feasibility study which demonstrated strong economics on an unoptimized basis. We are going to an optimization phase over the course of 2018 which we believe will enhance those economic returns. The base case pre-feasibility study resulted in the conversion of 4.7 million ounces into reserves adding to the 1 million ounces already in inventory. During the year, we went back to the fundamentals at Cochenour focusing on exploration which resulted in an initial reserve estimate. We now expect to generate 30,000 to 50,000 ounces per year at Cochenour starting in 2019. And we are quite optimistic that we will be able to perpetuate that initial reserve as we gain access for deeper exploration from our production headings. At Borden not only we advance on the study side, we also began construction and we expect first production by late 2019. Lastly, we realized excellent value from the sale of non-core assets during the course of the year realizing over $0.5 billion in proceeds, which redeployed into new large scale geological districts in the Yukon with the Coffee project and in Chile with Norte Abierto. As we indicated last month with the release of our quarter guidance our 2020 plan has not changed. We are more optimistic than ever in our ability to deliver on our plan to grow production and reserves by 20% and reduce all in sustaining cost by 20% by 2021. For 2018, we expect to see quarterly gold production in a wider range than we experienced in 2017 of between 575,000 ounces and 650,000 ounces of gold per quarter. Gold production in the first two quarter of 2018 is expected to be at the bottom of the range and moving to the higher end in the second half as both for Cerro Negro and Éléonore open up additional mining funds and ramp up ore production. While we expect to achieve full year all-in sustaining cost guidance of $800 per ounce plus or minus 5%, we anticipate the effect to be higher in the first half of the year as a result of lower production. 2018 is slated to be a catalyst rich year for Goldcorp with the completion of execution on several operation optimizing projects such as pyrite leach at Peñasquito and the ramp-up of sustainable capacity at our Éléonore and Cerro Negro mines. In addition, major studies are expected our longer term projects at NuevaUnión and Century while a study on the potential further expansion and optimization at Cerro Negro is expected by the end of the year. Finally, our first dossiers at the Coffee last summer, was quite fruitful with a major new discovery which will lead to an updated mineral resource estimate in the second quarter of 2018. As you can see on this slide, our balance sheet continues to build strength on strength, evidenced by one of the strongest credit ratings amongst our senior peers. We are exiting an intensive capital investment period and we are going to one that allows us to harvest on that investment. Our net debt to EBITDA is on a steep downward trend. As you can see in this chart, it’s currently at about 1.2x and expected to decrease to below 1x by 2019 and essentially driving to zero by 2021. With over $3 billion in liquidity and strong cash flow generation from our core assets in the upcoming years, we are well-positioned to drive down our net debt to effectively zero over the next 4 years as we prepare for the next capital investment cycle to build the next generation of mines beyond 2020. With that, I will turn it over to Todd to discuss our operational performance during the quarter.
Todd White: Thanks, Dave. As you mentioned, we have now delivered six consecutive quarters of strong and consistent operational performance. Similar to last quarter, fourth quarter performance was supported by continued solid results at Cerro Negro and Pueblo Viejo and a much improved quarter at Red Lake, Éléonore and Musselwhite compared to the third quarter. Cerro Negro had another strong quarter driven by higher productivity and alignment with our ramp up and productivity improvement plan. Mariana Norte development work continues as planned and we expect to begin production mining during the second half of 2018, which will allow us to complete the ramp up to 4,000 tons per day. At Peñasquito, we experienced better production than anticipated mostly due to higher than planned grade as we continued mining in Phase 5D. We don’t expect further positive grade reconciliation in 2018 as over 50% of the ore to be processed this year will come from lower grade surface stockpile. You would have noticed that gold production for the quarter was lower than the same period a year ago. This is a result of the planned transition from the higher grade area of Phase 5 at the bottom of the Peñasco pit through lower grade ore from the beginning of Phase 6. We expect that production will revert back to higher grade ore in 2019 as we wind down the Phase 6 stripping campaign and access higher grade ore. In combination with the early completion of the Pyrite Leach project in the fourth quarter of this year, it will position Peñasquito to generate significant free cash flow in the years to come. At Éléonore, we have seen performance continued to improve averaging 5,000 tons per day through the mill during the quarter. Mill throughput improved by 15% compared to the same period a year ago and by 4% compared to the third quarter as development efforts early in the year opened additional mining fronts in the fourth quarter. We also benefited from planned higher grade ore during the quarter as part of the normal sequence. We expect the grade to come back down early in 2018 and getting back to the fourth quarter 2017 level during the second half of the year. The fourth quarter was the highest producing quarter at Éléonore since the surface stockpile accumulated during the initial development of the mine was depleted at the end of 2015. The next catalyst at Éléonore is the completion of the development of Horizon 5, which remain scheduled to come online in the second quarter of this year as planned. This will provide us with additional mining fronts, allowing us to achieve optimum sustainable gold production rates going forward. At Red Lake, we continue to increase the use of bulk mining methods. The mining and milling rates of approximately 2,300 tons per day achieved during the fourth quarter were the highest rates achieved at Red Lake since the end of 2012. The investment to optimize the long-term value of Red Lake camp as a higher tonnage, lower grade operation will continue throughout 2018. During the fourth quarter, the site continued with higher underground development rates achieving 39 meters per day, an 18% increase over the same period a year ago and similar to the rate achieved in the third quarter. This is expected to liberate more ore in future periods and support the transition to bulk mining at the high grade zone is nearing completion. The Red Lake mill continued operations in the fourth quarter to supplement the Campbell mill and will be used in 2018 to provide operational flexibility to accommodate higher ore tonnages when required. In the medium term, Red Lake is expected to benefit from additional tonnage from Cochenour targeting around 10,000 ounces in 2018 and ramping up to a range of 30,000 to 50,000 ounces annually from 2019 onwards. Our portfolio repositioning is complete and our attention now turns exclusively to our existing operations and on the execution of what we believe is the most exciting pipeline in the gold industry. This means that we expect to harvest a strong return from our existing operations over the next 4 years, while we prepare the strongest investment cases possible for our next generation of large-scale opportunities, including Century, NuevaUnión and Norte Abierto. One thing that you would notice on this slide is that there are many milestones and stage gates in 2018 and early 2019. We are more focused than ever on making sure that we deliver on all of these milestones and continue to advance each project through our investment framework. As Dave mentioned earlier, we are not only investing in our shorter term projects such as Cochenour, Borden and Coffee, but we are committing $100 million this year to advance the next generation of value creating opportunities I just mentioned. Since we gave you a comprehensive update on our projects and exploration program during our recently held Investor Day, I am not going to go through each of them in detail. But one point, I would make on exploration is that we have commenced drilling at Norte Abierto to enhance our geological models and provide geotechnical and metallurgical samples as well as testing high priority satellite targets. Lastly, at Coffee the adequacy review process is advancing as planned. The Yukon permitting authority or YESAB, recently requested additional information in order to continue to move through the process, which was expected as part of the normal course review of the project at this stage. Our current schedule was developed allowing time for information requests such as this one. We expect to be in a position to submit the information requested during the month of March without any impact to the current proposed schedule. As previously mentioned, we expect to have an updated mineral reserve and mineral resource estimate for Coffee with our first quarter results which will be based on last summer’s drill program. We will stay tuned for Paul’s update on this next quarter. At Investor Day, you heard us talk about beyond 2020, which is what we call the investment in our longer term portfolio of projects including Century, NuevaUnión and Norte Abierto. The objective of the beyond 2020 is to maximize the net asset value of Goldcorp’s existing mines and projects by continuing to grow low cost gold production from expanding gold reserves through exploration and development, in other words, organic growth. So beyond 2020 is not just about these Greenfield projects, but also about optimizing what we already have in operation. Our planned growth in reserves to 60 million ounces is not currently factored into our production profiles. These additional ounces afford us opportunities for further Brownfield expansions which tend to be relatively low risk, high rate of return and relatively short timeline opportunities. Based on the success of a reinvigorated exploration program under Paul’s leadership, this is actually allowing us to look beyond the 5-year 2020 plan and looking at what the next generation of mines could be. When you look at our Canada region, Century is clearly foundational to beyond 2020 and we will be releasing the optimized pre-feasibility study later this year. The exploration success at Coffee is allowing us to start thinking about what the Phase 2 could look like. Musselwhite has been overlooked in the past from an exploration standpoint and recent results are very encouraging identifying new mineralization. This is early stage, but very exciting nonetheless. In Latin America, Cerro Negro has had some recent success at Silica Cap and we continue to see tremendous potential for further reserve growth from advance targets allowing us to look at expansion scenarios. Ongoing studies on these expansion scenarios are expected to be completed by the end of the year. NuevaUnión and Norte Abierto have the potential to provide that long-term sustainable 30-year to 40-year mine life opportunity which could add 1 million gold equivalent ounces between them to our production profile. Lastly, Peñasquito exploration is an area that I think has been underappreciated in the past. We have really put a focus on developing that opportunity and we have identified a number of targets in the district which give us the opportunity to explore from material to feedback complex. Its early days, but we think this positions us well for future growth opportunities beyond 2020. With that operator, we would now be pleased to take questions.
Operator: Thank you. [Operator Instructions] Your first question is from Chris Terry from Deutsche Bank. Please go ahead.
Chris Terry: Hi guys. Thanks for taking my questions. First one is just on the cost side overall in the industry, your plan to go down to $700 an ounce AISC by 2020, is that factoring in any inflation that we are seeing on the consumables or the input side, just saying some of your peers I guess facing some pressure on that and just trying to think about how realistic that number is if we say any macro pressures come through?
Todd White: Sure. So, Chris, this is Todd. When you take a look at it, clearly a big driver on that cost is our production profile expanding as we execute on our mine plans in front of us. But clearly cost and inflation I would say we generally keep that flat in our forecast going forward, but we generally look at somewhere around 3% to 4% a year in efficiencies that we need to gain just to offset that. So, we do have a flat inflation in our plan, but clearly, our focus is really driving the denominator by executing on our plan as well as attacking that inflation aspect through further efficiency gains.
David Garofalo: The other thing I would add there Chris is we have seen very prudent pricing on byproducts. Zinc is trading north of $1.50 rate there. We are using long-term prices around $1.30. Our currency assumptions are quite conservative as well. And in fact, if we mark to market our all-in sustaining cost target of $700 an ounce for current exchange rates and zinc prices would be actually well below the $700 target and notwithstanding inflation pressures generally.
Chris Terry: Okay. Okay, thanks. And then just on the $250 million sustainable with efficiency program, you said you are most of the way through that, when would you be in a position to quantify what if you go beyond, I think you indicated that there is further opportunities in that, when would we expect an update on that?
Todd White: So, I mean, actually right now, as we go through this process, we have identified what we call it our Phase 1 opportunities and then our Phase 2. So, we have already identified opportunities beyond the Phase 1, which we collectively see is opportunity around that $100 million. I mean, just for a little color some of the, for instance, a Phase 2 opportunity is generally something that somewhat contingent upon getting to the efficiency gains elsewhere. So for instance, as we improve mining rates than our milling – we can attack our milling rates and gain value and efficiency there. So, it’s really as we worked through this by the middle of the year we would expect to be at our Phase 1 efficiency rates at which point we would then be start beginning executing on those Phase 2 opportunities.
Chris Terry: Okay. And how do we think about the revenue versus the costs on those efficiencies?
Todd White: Yes. Again, so we are always very careful to classify these as $250 million of efficiencies, because there is a pretty significant component that is revenue. Anytime we are addressing mill throughput or enhanced recoveries, those are clearly efficiencies, but the real driver is the additional revenue. So, it’s roughly around 60% revenue, 40% cost.
Chris Terry: Okay. Okay, thanks. And the last from me, just on Coffee, I know you went through the details just a minute ago, but I guess it’s a little bit of confusion within the market in terms of some of the media articles that have been out and the timeline and what you expected versus what’s played out? Can you just maybe comment a little bit more on the process from here and what’s expected? Thanks.
Brent Bergeron: Hi, Terry. This is Brent Bergeron. So, just to clarify a little bit, we are still in the adequacy process right now with YESAB. This is the normal process for them to get back to us in terms of information request. In our schedule, we are scheduled to complete the adequacy process hopefully by the end of the year and then go into the permitting phase. So, we anticipate these types of information requests coming to us, which is part of the normal process and our team will work very efficiently to get back to them with the answer to all of their clarifications or questions.
Chris Terry: Okay. Thanks, guys.
Operator: Thank you. [Operator Instructions] The next question is from David Haughton from CIBC. Please go ahead.
David Haughton: Hi, Dave and team. Thank you very much for the update. Just looking at HG Young, you are talking about the potential to drift in there on Level 14 or 21 from Campbell. On the Analyst Day, it was kind of put out as something for the first half of ‘19 or late 2019 to get into mining, but I kind of read the text in your report and it seems like your thinking is a little bit quicker than that, can you explain what your thinking is there?
Paul Harbidge: Hi, David, it’s Paul and I was actually invited last week and there is all drift that go out there so we are rehabilitating at the moment to give us the platforms for drilling. But we are certainly not looking at bringing that schedule forward. It’s all about advancing the geological model. So the first drill companies are going in and we will be drilling latter this quarter and we will have to give you an update on those resources. But certainly we are not looking at accelerating the schedule at the moment. Everything is on track with the development of the drilling.
David Haughton: Alright. Thanks for that Paul. And whilst I have got you, Todd had mentioned Musselwhite being underappreciated and yet I thought you gave it a pretty good showing at the Analyst Day with the main focus there being their PQ Deeps, so is that really what Todd had been referring to?
Paul Harbidge: If you remember from the Investor Day, there was not only PQ Deeps that was direct wing zone as well which locates 200 meters from the no development and we are looking to convert a portion of that this year into reserves. We have also got that Karl Zeemal open pit target, net surface 6 kilometers from the Musselwhite mine. And then we have also got that looking at the extensions of the West Limb as well from North Shore drilling lighter in the year. So there is multiple opportunities as well as we are undertaking a regional study on the entire North Cariboo Greenstone Belt to provide as additional opportunities to follow-up in the summer field season.
David Haughton: Okay. Thank you very much Paul.
Operator: Thank you. The next question is from Greg Barnes from TD Securities. Please go ahead.
Greg Barnes: Yes. Thank you. Todd, I just want to get a sense of how the mining rates are going at Éléonore and Negro mining rates do you exit Q4 at those operations?
Todd White: Yes. Again as I said at Éléonore, Éléonore had a quarter that I think was pretty consistent with what we think see for the first half is around 5,000 or 5,200 tons per day mine in the quarter. At Cerro Negro we were right on that 3,000 ton per day, which again is pretty consistent with what we would expect out of Cerro Negro for the first half of the year and then jump in that as Mariana’s Norte opens in Q3 and comes on strong in Q4.
Greg Barnes: How do you see the progression in mining rates through the second half of the year there, when you are going to get 7,000 tons a day in Éléonore and 4,000 tons a day at Cerro Negro, will it be Q4?
Todd White: So in the case of Cerro Negro we would expect to be in the range in Q4. And then at Éléonore as we discussed at Investor Day, we see the mining rates at Éléonore moving from say 5,200 or so in the first half of the year, moving up to around 6,200 by Q4.
Greg Barnes: And that will improve into 2019 then?
Todd White: And that would be what we would expect going forward, yes.
Greg Barnes: 6,200 tons a day going forward?
Paul Harbidge: Yes. You recall, Greg, the focus was in getting the 400,000 ounces a year sustainably from it – that operation. And there will be variations in the throughput rate over the ensuing few years of between 6,200 to sometimes about 7,000 tons a day. So we are less focused on the tonnage as we are focused – more focused on getting maximum ounces at the lowest cost. So we will get to 400,000 ounces sustainably, but we will be quite selective in terms of the where the ore tonnage is going to come from.
Greg Barnes: Got it, okay. Thank you.
Operator: Thank you. [Operator Instructions] Your next question is from Steven Butler from GMP Securities. Please go ahead.
Steven Butler: Thanks operator. Todd sorry excuse me, you mentioned on your commentary that Peñasquito will be delivering almost 50% of feed from the low-grade stockpile this year, is there any particular choppiness to the profile for gold production expected on a quarterly basis assures as we should think about modeling Peñasquito’s profile this year?
Todd White: When we kind of see the grade pretty stable in terms of gold grade at Peñasquito around the 0.4 range as we indicated in Investor Day and we see that pretty stable across the year. We do see a lower in the second half than the first half profile though that comes down a bit. So I wouldn’t say choppy, I would say more linear from start to finish.
Steven Butler: Okay. Little over second half you said?
Todd White: Correct.
Steven Butler: Okay. And that was largely at something I also forgot about. I will sign off. Thanks.
Operator: Thank you. This concludes today’s question-and-answer session. I would like to turn the meeting back over Mr. Garofalo.
David Garofalo: Thank you, everyone for your attendance and attention. And if you have any follow-up questions, please don’t hesitate to reach out to our group.
Operator: Thank you. The conference has now ended. Please disconnect your lines at this time. And we thank you for your participation.