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AuRico Gold Inc. (NYSE:AUQ)

Q3 2012 Earnings Call

November 13, 2012, 10:00 am ET

Executives

Anne Day - VP, Investor Relations

Scott Perry - President & CEO

Charlene Milner - VP, Finance

Peter MacPhail - COO, Canada

Analysts

Rahul Paul - Canaccord Genuity

Brian Christie - Desjardins Securities

Operator

Good morning. My name is Matthew and I will be your conference operator today. At this time, I would like to welcome everyone to the AuRico Gold Third Quarter Results Conference Call. All lines have been placed on-mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator Instructions) Thank you.

Anne Day, you may begin your conference.

Anne Day

Thank you, operator and good morning everyone. Thanks for joining us today for the AuRico Gold third quarter earnings results conference call and webcast. On the line today, we have Scott Perry, our President and CEO; Charlene Milner, VP Finance and Interim CFO; Russell Tremayne, Chief Financial Officer, Mexico and Peter MacPhail, Chief Operating Officer, Canada. They will also be available during the Q&A period at the end of the call. At the end of the presentation, the operator will provide instructions again for those who wish to ask questions. Should you wish to follow along via our webcast it is available on our home page at auricogold.com.

Before we begin, I will go through the abbreviated version of our forward-looking statements which are also provided in the press release and today’s presentation. Some of today's commentary may certain forward-looking information for AuRico. In this respect, we refer you to our detailed cautionary note regarding forward-looking statements in our press release and presentation. You are cautioned that actual results and future events could differ materially from the respective conclusions, forecasts or projections. We refer you to the section entitled the risk factors and our latest MD&A and other filings available on SEDAR which set out the material factors that would cause results to differ.

I will now turn the call over to Scott Perry.

Scott Perry

Okay, thank you Anne and welcome ladies and gentlemen and thank you for attending our call. I am going to start off from slide number four. I am just looking to recap some of AuRico’s recent highlights. From an operations perspective, the key quarterly highlights on September 3rd our Young-Davidson mine declared commercial production. In Young-Davidson’s third month of commercial operations being the month of September, the mine produced in excess of 9,000 ounces at cash cost of $639 per ounce. On the back of this positive transition and commercial production this favorable monthly performance continued in October where again the mine produced in excess of 9,000 ounces at similar operating cost levels.

Mill feed grades are continuing to increase through a combination of higher grade open pit ore and the initial production contributions from the underground. Young-Davidson is transitioning smoothly from commissioning underground operations and during the fourth quarter, the company has targeted mining 90,000 tons of underground production at grade in excess of 3 grams per ton. This included the 12,000 tons mined in the month of October, at grade averaging 4 grams per ton.

We are looking forward to reporting production for November and December, where production levels should be favorably underpinned by the increased presence of higher grade tonnage being mined from the underground operations.

The key corporate development highlights during the quarter was that on October 9th, the company entered into a definitive agreement with Minera Frisco, pursuant to which, Minera Frisco will acquire the Ocampo mine as well as a 50% interest in the Orion development project for the total consideration of $750 million in cash.

As previously communicated, this transaction will allow AuRico to deliver a meaningful return of capital to our shareholders while significantly enhancing our liquidity position and ensuring the optimum level of financial flexibility to support our current operations. This transaction is expected to close in early December and will be at this point in time that the company will be looking to provide specific details on the exact form of shareholder capital returns.

In terms of other asset sales, in the month of October, we were opportunistic in monetizing our non-core share holdings to further bolster the company’s liquidity positions, whereby the company sold its entire equity interest in Endeavour Silver Corporation and Crocodile Gold Corporation on a block trade basis for growth proceeds of $105 million.

On the exploration front, we recently provided an update on exploration activities that have two core operating assets. At El Chanate, this year’s exploration program is focused on understanding the potential for extending the open pit mineralization beyond the existing ore body. To that end, three new discoveries were announced at El Chanate that are directly on trends in the open pit and represent a strong indication of potential resource growth. This year’s exploration programs and the success based plans proposed to next year, we’ll continue to focus on follow-up drilling to further evaluate the exploration potential at El Chanate.

Meanwhile at Young-Davidson West, the drill program continues to demonstrate the mineralization expense beyond the existing resource. Additional work will be conducted further tests for continuity of the Young-Davidson [wet] zone to the west and at depth and this will be a key objective in next year’s exploration program.

From the legal side, we resolved our only outstanding legal item wherein on the October 5, we reached an agreement with Frisco that 2008 cross action claims powered by (inaudible) account. The settlement announced under the agreement is estimated at $13.5 million which will be offset by an insurance receivable of some $11 million.

So that highlight covers our guidance for the full year and serves as reconfirmation that the company’s asset base is well positioned to meet our guided production levels in 2012. In production of 78,000 to 88,000 ounces at El Chanate at cash cost of $430 to $460 per ounce, while at Young-Davidson again reconfirming production guidance of 55,000 to 65,000 ounces at cash cost of $550 to $650 per ounce.

Moving on to the next slide, slide number five, this slide really highlights AuRico’s favorable attributes moving forward. On the back of attending sale via Canada operation, we have streamlined our asset base and in doing so we have significantly traded up on the overall quality of the asset base which positions AuRico well for reliable, consistent and sustainable performance.

The company offers many of the key attributes that drive shareholder value being North American jurisdiction. Look at our two core assets being Young-Davidson and El Chanate both assets were fully constructed and domicile in North America.

When we look at the cost profile of this asset base moving forward, these assets are very well positions on the world industry average cost curve. We have an internal organic profile and a growth profiles for the next five years. If you look at production per share count, we expect production per share to be growing over the next five years.

But one of the key attributes that I particularly ascribe to is mine longevity. If you look at the Young-Davidson operation just based on reserve profile, Young-Davidson has an indicative mine life of some 18 years, while at El Chanate; we have reserve life of some eight years. All of these underpinned by peer leading balance sheet. On the back of this year’s divestments, our company has notably on a stronger financial footing moving forward.

We have a purer gold portfolio and we are totally unhedged, so we are fully participating in today's strong gold metal price environment. So looking forward, this is an asset base that should be generating a significant stream of positive cash flow. On the back of the stream line asset based and in particular, the G&A cost savings and optimized balance sheet.

All of which is expected to provide a solid platform for immediate as well as ongoing shareholder friendly initiatives, which we look forward to provide details on as we progress forward. This concludes my prepared introductory remarks and with that I would now like to pass the call to Charlene Milner, our Vice President of Finance who will walk us through the company’s third quarter financial performance.

Charlene Milner

Thank you, Scott and good morning ladies and gentlemen. Before beginning, I would like to note the majority of the slides presented today will contain the results of both our continuing and discontinued operations. You may recall that we've divested our Australian operations in the first quarter of this year. We also successfully divested two of our other non-core assets in the third quarter with the El Cubo and Guadalupe depositions closing on July 13.

In addition as Scott mentioned, we announced the pending disposition of the Ocampo mine on October 9. Lastly, El Cubo and Ocampo mines contributed to AuRico’s third quarter results; El Cubo for 13 days and Ocampo for the full quarter, however they have both been presented as discontinued operations and accompanied financials.

Starting with slide eight, once again it’s important to note that the operational results include the results of both our continuing and discontinued operations. Consolidated gold production was lower than the prior year corresponding period reflecting a lower production cost revision from Ocampo and only 13 days of production at El Cubo prior to deposition partially offset by improved production at El Chanate and the production contribution from the newly commissioned Young-Davidson mine.

Total cash costs were $625 per gold equivalent ounce prior to a $72 per ounce reversal of the write down taken on the Ocampo heap leach inventory. You may recall that the company recognized a $14.4 million write down in this inventory in the second quarter when it was determined that the cost of mining activities related to heap reservoir would not be fully recoverable.

However, due to increases in metal prices in the third quarter, the company reversed $6.1 million of this write down, $3.7 million of which represented cash cost in accordance with the requirements of International Financial Reporting Standards.

After this reversal, consolidated cash costs were $553 per gold equivalent ounce in the third quarter. This result was higher than Q3, 2011 reflecting the higher cash cost results at Ocampo and the inclusion of Young-Davidson cash cost for the first time.

In terms of metal prices, we have realized the gold price of $16.64 per ounce during the quarter and a total price of $29.87 per ounce both being lower than the prior year corresponding period, and as a result combined with the decreased production mentioned previously, our third quarter revenues declined by $35 million in the prior year.

Turning to slide eight, the operational results noted on the slide includes the results of our core operations only being the El Chanate and Young-Davidson mine for the current year and El Chanate mine only in the prior year. These core operations produced 29,291 gold ounces in the third quarter. This result includes production from Young-Davidson for the month of September subsequent to declaring commercial production on September 1.

In the months of July and August, Young-Davidson also produced 7,922 gold ounces for a total of 17,825 gold ounces for the quarter. During the month of September only Young-Davidson realized cash costs of $639 per gold ounce.

Total cash cost at El Chanate were $434 per gold ounce in Q3 of this year, a $31 improvement over the prior year corresponding period when cash costs reflect $465 per gold ounce. Combined [operations] achieved cash costs of $504 per gold ounce in the third quarter of 2012, an emergence of $1,169 per ounce.

Slide nine illustrates the key financial performance highlights for the quarter, and again please note hat this slide includes the results of both continuing and discontinued operations. Earnings from operations decreased to just under $17 million versus the prior largely as a result of the decrease in production in revenues mentioned previously and due to reclamation and care maintenance expenditures of the Kemess South mine which is in decommissioning phase.

This mine was acquired in October 2011 through the Northgate acquisition and as a result doesn’t appear in our prior year earnings. Net earnings decreased over the third quarter of 2011 as a result of lower earnings from operations that I have just described and a $39.2 million of deferred income tax expense that was recognized as a result of pending disposition of Ocampo. This was offset by various realized and unrealized gains most notably personally the company recognized $20.3 million in unrealized gains on shares of Endeavour Silver and Crocodile Gold which were received on the disposition of El Cubo and the Australian operations which were mark-to-market at the end of the period.

The company also recognized the $24. 1 million gain on the disposition of the El Cubo mine and the Guadalupe exploration on July 13 and finally the company recognized the $14.4 million unrealized gains on the fair value of the auction component of the convertible senior notes which resulted from a decline in the company’s share price during the quarter.

Our adjusted net earnings of $29.5 million for the quarter was also lower than Q3 of prior year and the next slide will reconcile this adjusted earnings result. Lastly, cash flow from operations were $6.2 million was lower than the prior year corresponding period due to the decline in production at Ocampo, lower realized metal prices and an increase in non-cash operating working capital. Before changes in working capital, our operating cash flow was $40.6 million for the quarter as compared $57.3 million in 2011. I will explain this adjusted cash flows from operation results in further detail little bit later.

Moving on slide 10, on this slide we are illustrating our adjusted net earnings release segregated between continuing and discontinued operations and when combined gives us the company wide adjusted net earnings results of $29.5 million or $0.10 per share. I will focus on the consolidated results which is the last column of the slide.

As mentioned in the previous slides, the reported net earnings result from both continuing and discontinued operations were $35. 2 million or $0.12 per share with the key adjusting items as follows.

The adjusted result adds back unrealized foreign exchange losses recognized in Q3 of $10.1 million which were due to the strengthening of the Mexican Peso and the Canadian dollars during the third quarter. These unrealized foreign exchange losses arise primarily as a result of the translation of the company’s Mexican Peso and Canadian dollars denominated preferred tax liabilities into US dollars. The adjusted result to that the unrealized gain of $14.4 million on the option component of convertible senior notes, the adjusted results to that the unrealized gain on investments of $20.3 million which arose primarily from the increase in the share price of Endeavour Silver from July 13 to September 30.

The adjusted results suggest other unrealized gains and other expenses of $1.6 million and add back $5.3 million in transaction cost related to the disposition of El Cubo and pending sale of Ocampo. The adjusted result deduct the $6.1 million reversal of the second quarter net realized full value adjustment on the Ocampo heap leach inventory as these reversals are not indicative of the company’s cost [development] performance.

The adjusted results add back the $39.2 million of deferred tax expense recognized as a result of the pending disposition of Ocampo. This slide represents the portion of the taxes that were ultimately (inaudible) when the Ocampo mine is divested and as it is only (inaudible) at the time it is a non-cash item in the third quarter.

Finally, the adjusted results to $24.1 million gain that was realized under the disposition of the El Cubo mine and the Guadalupe exploration property and as a result of the consideration received exceeding the book value of these assets. The notional tax compared to these items is a $6 million of deferred tax expense which result in a final consolidated adjusted earning of $29.5 million or $0.10 per share.

Slide 11 illustrates the operating cash flow results for the quarter and again please note that this slide includes the results of both continuing and discontinued operations. The bottom line cash flow from operations were $6.2 million or $0.02 per share which is lower than the prior year quarter due to the decline in Ocampo, lower realized metal prices and increases in non-cash operating working capital. The increase in working capital is largely due to following items.

As a result of the declaration of commercial production at Young-Davidson $6.6 million of the mine’s working capital balances versus inventories, receivables and payable was required to be reclassified to operating cash flows. These working capital changes were previously classified in investing activities as capital expenditures. This is a one-time investment only associated with the mine transition into commercial production.

In addition, there was an increase in Ocampo’s net receivable position $4.7 million which was largely associated with increased tax receivable balances contributable to (inaudible) year end tax refund. The company also recognized an $8.7 million receivable for additional proceeds related to the sale of El Cubo for Endeavour Silver representing a working capital adjustment in accordance with the El Cubo mine sale agreement.

And finally, there was an increase in the valuation of the various form (inaudible) inventories at Ocampo during the quarter of $5 million. Excluding the non-cash working capital impact, operating cash flow per share was $40.6 million or $0.14 per share. This concludes the financial overview presentation and so with that I’ll pass the proceedings back to the operator for questions.

Question-and-Answer Session

Operator

Your first question comes from the line of Rahul Paul with Canaccord Genuity. Your line is open.

Rahul Paul - Canaccord Genuity

At Young-Davidson, what were the average open pit process in October?

Scott Perry

Hi, Rahul. It's Scott here. We haven't provided that level of detail in terms of monthly updates for the month of October. I think one of the things that we try to be very transparent with the market is that we got to gradually start leaning away from these detailed monthly update. So I think on a go-forward basis, what you will see is this closing it has a level of gold production we are happy to disclose that, and we are providing small narrative on a go-forward basis.

Rahul Paul - Canaccord Genuity

If I look at - what I am trying to get at is, if I look at what you mind in Q3 the average open pit grades, open pit was (inaudible). I am just wondering as to what grades your mining these days and if you think you can maintain open pit grades to the middle at 1.5 to the 1.6 gram range in November and December, because September the grades to the (inaudible) 1.6 million. I am just trying to get a sense of how long should I expect that to continue?

Scott Perry

So addressing your question when you look at the Q3 mining grade from the open pit operations, it’s very important to remember that we are also mining a blend of lower grade material which remains stock piled as part of that long-term low grade stock pile. So that mining grade is not really indicative of what was being presented to the mill in Q3. The actual head grade that was presented was around 1.63, as you mentioned. I am happy to your concern that in the month of October the actual head grade that was presented to the mill was better than the 1.63.

Rahul Paul - Canaccord Genuity

Okay, that was including open pit.

Scott Perry

That was predominantly open pit and 12,000 tons from the underground where the average grade was just under 4 grams per ton.

Rahul Paul - Canaccord Genuity

Okay, thanks Scott. And just moving at Young-Davidson again, capital cost year-to-date are the 264 million. The last guidance is 240 million, but looks like we saw roughly 50 million in Q3 related to capitalized interest and carry-overs from 2011. What should we expect in Q4 including all items?

Scott Perry

I am sorry capital guidance at Young-Davidson for the full year is up to $240 million, and in our guidance that we carried at the beginning of this year is based on what we expect to be committing to and so that guidance is still valid. When you are looking at that section of [MD&A] you have to bear in mind that that is total cash outflow at the property. One of the key items there is it also represents commitments made last year where the expenditure was already recorded capital expenditure. So the account payable balances are now being created this year, so its not really an apples-to-apples comparison.

Rahul Paul - Canaccord Genuity

But should I mean in terms of the use of cash, use of cash proceeds sort of thing, should I assume any more related to 2011 capital in Q4, are you pretty much done?

Scott Perry

The property is obviously fully constructed now and that would declare commercial production. But in terms of the capital expenditure guidance for this year on a committed basis, it continues to be $240 million.

Rahul Paul - Canaccord Genuity

Just one last question with the underground ramp up, then I will get back in queue. Obviously a good progress there, are your underground mining cost close to targeted level. So I think we will look at around $30 a ton with other peaceful plant, are they much higher at this stage?

Scott Perry

Yeah, the underground unit mining cost in terms of guidance that we have provided is under 35 storage per ton. We’ve only got about three weeks worth of experience at the moment. So we haven’t actually being recording or been in a position to account the underground unit mining cost. But from what we are seeing, the mine is performing really well. In fourth quarter of this year we are targeting some 90,000 tons, from the underground operations. So that would imply, and if you look at the month of November and December, we should be averaging close to 1300 tons per day on a daily basis. So in terms of the targeted underground unit mining cost, we think its up $35, it’s very achievable.

Rahul Paul - Canaccord Genuity

And then will you be expensing out costs for the underground in Q4 or is some of that going to be capitalized.

Scott Perry

Anything that's associated with operating will be expensed, and obviously any sort of development, for example, the ongoing sinking of the shafts or development that's going to be for the betterment of the ore body or giving us access or ventilation that will be capitalized just like what you'd see at any other underground mining operation.

Operator

(Operator Instructions) Your next question comes from the line of Brian Christie with Desjardins Securities.

Brian Christie - Desjardins Securities

Scott you alluded to lower G&A on a go forward, wondering if you can give us a sense on that and then maybe you can just refresh the effective tax rate for both fourth quarter and 2013.

Scott Perry

Yes obviously with the disposition Brian of Ocampo, Ocampo was a significant asset within our portfolio. So if you look at our G&A component both down in Mexico and also here in terms of corporate in terms of supporting that operation, it did represent quite an extensive presence.

We are finalizing our budget as we speak, but I would be comfortable with guiding that you could expect to see a 20% to 25% reduction in G&A company wide; and in terms of effective tax rate, I know its difficult to those in the analyst stream because it’s so many moving parts in our financial statement, the continued and discontinued operations. I think on a go-forward basis as we go into next year, its just the two core assets, the effective tax rate from an accounting perspective should be around 30% and then on a cash basis Young-Davidson and cash should be around 30% on a cash tax basis over the life of the mine.

But do bear in mind we do have some tax (inaudible) pool there. So we don't expect to be paying tax for at least the next two years, and likewise down in El Chanate, we are paying a tax under the regular tax [regime] and again tax raised in Mexico is 30%. So there's really quite an easy answer to that Brian, it’s 30% for accounting, 30% for cash flow but Young-Davidson should have tax yields for the next two years.

Operator

(Operator Instructions) your next question will be a follow-up from Rahul Paul with Canaccord Genuity.

Rahul Paul - Canaccord Genuity

Probably a question for Peter MacPhail. At Young-Davidson you mentioned that on the underground you are averaging about 1300 tons a day, do you expect to be averaging about 1300 tons a day for the rest of the years. I'm just curious as to what level can you get that throughput rate up before underground traffic becomes an issue because as far as I understand you would be using the ramp to halt which is a [loss] to the mine.

Peter MacPhail

Thanks Rahul, its Peter here. The mining we are doing is in the upper level of the mine. Most of the development is much further down. So there's not a lot of impact there. However that 1300 tons a day I think we get up to 1500 tons a day or they are both before we have the shafts commissioned. So that's where we will remain for the next while.

Operator

(Operator Instructions) We have no further questions at this time. I will turn the call back over to Mr. Scott Perry for any closing remarks.

Scott Perry

Okay, thank you Operator. We would like to thank everyone for joining us today and for your interest in our company. And with that, I'll conclude the call and of course if you do have any further questions, please do not hesitate to reach out to us. Thanks everyone.

Operator

This concludes today’s conference call. You may now disconnect.

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