San Gold Corporation (OTC:SGRCF) Q4 2012 Earnings Conference Call April 12, 2013 11:00 AM ET
Ian Berzins - President & Chief Executive Officer
Tim Friesen - Communications Director
Gestur Kristjansson - Chief Financial Officer
Michael Michaud - Vice President, Exploration
Eric Setchell - General Manager, Rice Lake Operations
Derek Macpherson - National Bank Financial
Mark Benjamin - M Partners
Good morning. My name is Audrey and I will be your conference operator today. At this time I would welcome everyone to San Gold Corporation’s 2012 financial and operating results conference call. After the speakers remarks there will be a question-and-answer session. (Operator instructions).
Mr. Tim Friesen, Communications Director, you may begin your conference.
Thank you, Audrey. Welcome to San Gold’s 2012 results conference call. Today’s presenters are Ian Berzin, the President & CEO and COO; Gestur Kristjansson, CFO; Michael Michaud, Vice President, Exploration and Eric Setchell, our General Manager of Rice Lake Operations is also in attendance.
Before we begin today’s management presentation, I will make a cautionary statement regarding forward-looking statements. This presentation includes statements that may constitute forward-looking statements or information. Any forward-looking statements made or information provided reflects the company’s current plans, estimates and views. Forward-looking statements and information, which includes all statements that are non-historical facts are based on certain material factors and assumptions that are subject to certain risks and uncertainties that could cause actual results to differ materially from those anticipated or suggested by the forward-looking statements or information. Consequently, undue reliance should not be placed on these forward-looking statements and information.
The information contained in our annual information form and at our quarterly management’s discussion and analysis, which is available on our website and on SEDAR, identifies some factors and assumptions upon which these forward-looking statements or information are based on and the risks, uncertainties and other factors that could cause actual results to differ. All forward-looking statements and information made or provided during this presentation are expressed, qualified in their entirety by discretionary statements and the cautionary statements contained in our press release and management’s discussion and analysis dated March 25, 2013.
With that, I’d like to hand the call over to San Gold’s President, CEO and COO, Ian Berzins.
Good morning everyone and welcome to San Gold’s 2012 fourth quarter call. As many of you know, I was appointed President and CEO of the company effective March 23. I’ve been with the company since May 2008 as Chief Operating Officer. In addition to my new responsibilities, I plan to continue in the role of Chief Operating Officer to ensure that I maintain a hands-on approach to the Bissett operation in support of Eric Setchell and his mining team.
Without question, we find ourselves in a very difficult situation in terms of share price and market capitalization. In my mind San Gold is now grossly undervalued relative to our peer group considering the infrastructure we have in place, the current levels of our production profile and the quality of our resources. We also have a strong balance sheet having recently completed a $50 million [block] [ph] deal to ensure we have sufficient funds to execute on our plans.
While we have some significant challenges in front of us, I’m truly excited to have the opportunity to lease San Gold at this juncture in time as we push to profitability, regain shareholder value and complete our transition from explorer to producer. Our general strategy at this time is to drive toward profitability in the near term and by that I mean getting to a positive cash flow situation as early as 2013 as compared to several years from now. The way this will be achieved is by continuing to reduce cash operating costs, critically looking at the capital costs associated with sustaining our current production levels, evaluating the proper level of exploration activity to support a conversion of resources to reserves, reducing overheads and divesting of assets that may not be key to the company at this time.
While the $50 million financing in March was expensive, it ensures a liquidity in 2013 while we continue to build our underground infrastructure on 16 and 26 levels in the Rice Lake mine in order to access the down dip extensions of near surface deposits we are currently mining and also to identify new ore bodies for long strike in the San Antonio mining unit as well as in the Shoreline Basalt and in the hanging wall of both these units at depth.
The fact that we could raise money in this market demonstrates the strength of our project and the confidence that people in the investment community have in our ability to execute on our plans. We are not going to grow for the sake of growth, but instead we’ll focus on getting the project to an optimal run rate where there is a proper balance between operating, capital and exploration requirements. To reiterate, our first priority now has to be to find the most direct path to free cash flows.
Let’s take a look at the overall metrics for Q4 2012 and then we will focus on where we’re going. Production for the fourth quarter of 2012 was 19,019 ounces of gold, which brings our total for the year to 86,506 ounces. This was another significant increase in annual gold production for the company, compared with our 2011 total of 74,277 ounces of gold produced.
Cash costs for the year were $855 per ounce, which is relatively stable compared with a cash cost of $848 per ounce in 2011. During the quarter, our mill averaged 1,827 tons per day, an 18% increase over the fourth quarter of 2011. Our mines produced at an average of 1863 per day during the quarter, a 26% improvement over last year.
The company sold 20,251 ounces of gold during the quarter for revenues of approximately $34 million and the company generated income from operations for the year of $21 million. All told, the company generated $42 million in positive cash flow from operating activities before changes in non-cash working capital.
I now want to review the company’s 2012 operating activities and following that, Gestur will discuss financials and Michael Michaud will discuss our exploration activities. Firstly, I want to commend our employees and contractors for the continued commitment to safe production. Statistically the company achieved its lowest accident frequency level in the history of the operation and on March 11 of this year, we marked our first full year without a lost time accident. This is an important milestone for San Gold that speaks directly to the caliber of our mining professionals and support personnel we’ve been able to attract to the project.
We continue to remain competitive in terms of our ability to attract skilled and experienced people to the company as well as bringing in new people to our industry. This has allowed us to meet and exceed deliverables in terms of safety, production and cost on a quarter over quarter basis. We finished the quarter with approximately 450 employees and 170 contractors supporting the project. We will continue to focus on training and developing capacity from local communities.
We reached a number of important milestones in 2012 as we continue our transition from explorer to producer. We set an annual gold production record for this project. Our mining and milling operations generated positive cash in each quarter of the year, overcoming substantial challenges in both the second and fourth quarters. As previously stated, we produced 19,019 ounces in the fourth quarter. Mining and milling rates were both in excess of 1800 tons per day.
We mined a total of 171,000 tons and milled approximately 160,000 tons during the quarter. Surface stockpiles increased somewhat from approximately 7,900 tons at the start of the fourth quarter to approximately 16,400 tons at the end of the quarter. Mill grade was 4.2 grams of gold per metric ton while recovery was 93%. The decrease in mill head grade in 2012 relative to the comparative period of 2011 is a result of increased processing of lower grade ore as the company transitions from L10 to L8 in the Hinge mine and as a result of a slight delay in extracting ore for some of the company’s higher grade [silting] [ph] blocks in 007.
Going forward, our strategy remains focused on developing an integrated Rice Lake mining complex. By investing in infrastructure and equipment to support the production profile and continue de-bottlenecking of the operation. Mining operations will focus primarily in the 007 and Hinge mines in 2013. Both mines are accessed from the Hinge 007 ramp portal which is located less than one kilometer from the Rice Lake mill. There will be a lesser contribution from Rice Lake during the year. Declines are being advanced in both Hinge and 007 zones. A 5.5 diameter raised bore hole was completed from surface to a depth of 335 meters to facilitate improved ventilation for the work areas and the down dip expansion of the 007 zone.
In the Rice Lake mine, development work remains primarily focused on extending 26 level towards the down dip extension of 007 and in extending the 16 level towards the down dip expansions of Hinge and ultimately 007 next year. Extending developments on 16 level and 26 level of the Rice Lake mine will allow us not only to access the down dip extensions of the new Shoreline Basalt deposits, but will also provide us with underground drill platforms and material handling infrastructure to facilitate more ore and waste coming up the A shift skipping system.
We are currently conducting a detailed review of these plans to determine what components are essential to complete this year, which can be delayed to future years and if there are any more cost effective solutions to achieving the same goals. Overall, it’s safe to say we have a great deal of work to do this year to extend the Rice Lake mine infrastructure into the Hinge and 007 deposits. And once complete, it’s important to emphasize the benefit this infrastructure will provide to the project’s overall production capacity, mine life and long term operating cost.
As always, we continue to focus on building a safer and more reliable operation and I would once again like to thank all our employees and contractors for continuing to execute on our strategy and for producing an excellent year.
I’d be happy to answer any questions you may have during the Q&A portion of the conference call. I’ll now ask Gestur Kristjansson to provide a review of the financial results. Gestur?
Thanks Tim. Good morning everyone. I’ll start by highlighting a couple of points. First we had a strong cash contribution in 2012 of approximately $42 million before changes in non-cash working capital, providing a huge contribution towards our development and discretionary exploration expenditures. Also contained within our approximate $13 million loss for the year is the recognition of a $5 million loss from our subsidiary investment in SGX. It should be noted that our current value for this asset was $1 while the market value of our shares in this depressed environment is approximately $5 million.
I’ll now discuss the balance sheet, the income statement and the cash flow statement for the quarter. All amounts presented here are in Canadian dollars. Starting with the balance sheet, we ended the year with current assets of $38 million and a working capital surplus of $12 million. During the year, the company invested $18 million in exploration activities, $62 million capitalization and development of mineral properties and $16 million in PP&E.
Current liabilities increased over the prior year by $9 million to $26 million as the scale of the operations increased and due to the generation of the deferred liability under IRFS related to the issuance of closer shares earlier in the year.
Moving to the income statement, San Gold reported revenues of $142 million on the sale of 85,690 ounces at an average realized price per ounce of $1,659. This was a 24% increase in revenues of $114 million recognized in the prior year. The increase in gold sales revenue in 2012 is a result of a 20% increase in the number of ounces sold and a 4% increase in the average realized gold price compared to the prior year.
Income from operations was $21 million for the year, compared to income from operations of $30 million in 2011. The decrease in income from operations is attributable to significantly higher depletion and amortization expense compared to the prior period against the higher gold sales levels.
Cash costs per ounce remained comparable at $855 per ounce in 2012 compared to $848 in 2011. The company recognized $41 million in depletion expenses in 2012 compared to $18 million in 2011. The increased depletion expense is attributable to declines in the measured and indicated resources over which the item was calculated. The expense is expected to decrease as the company is able to upgrade its significant inferred resources into higher confidence categories that have an economic plan associated with them
General and administrative expenses were $16 million, which is approximately the same as the prior year. Steps have been taken in the subsequent period to reduce this spend going forward. After exploration, general and administrative and other net expenses, including the recognition of a $4 million income tax recovery on flow-through shares, total comprehensible loss for the year was approximately $13.2 million or $0.04 per share compared to a net loss of $5.1 million or $0.02 per share in the same period of 2011.
Moving on to the statement of cash flows, the company generated cash flows from operating activities before changes in non-cash working capital of approximately $42 million or $0.13 per share during the year to double the contribution of $19.9 million or 6.4 cents per share in 2011. After changes in non-cash working capital, operating activities added plus $51.1 million or 15.7 cents per share in 2012 which again compares favorably to $9.6 million or 3.1 cents per share in 2011.
Capital spending in 2012 was focused on improving field infrastructure and the purchasing of commissioning and certain mobile equipment. Development activities continue to focus on developing access to new areas for ore production and exploration purposes. $9 million of market securities were sold during the year all in the latest to service our capital spending and exploration programs. In short, notwithstanding the weakness we’ve seen in the share price recently, it was another improving year for San Gold while the company continues to make operational improvements and enhanced the financial performance in almost every category.
The company remains well funded for a return to operating and development plans. We were very happy with including the $50 million unsecured debenture business fund and proceeds to be used to fund our ongoing development. Again as noticed, we are applying a critical eye to all planned expenditures, especially in the light of the current volatile economic environment.
That concludes my review of the financial statements and if anyone has any further questions I’d be happy to answer them during the Q&A. I’d like to turn it back to over to Ian.
Thanks Gestur. I’ll now ask Michael Michaud, San Gold’s Vice President of Exploration to provide an overview of our exploration activities. Mike?
Thanks Tim. Good morning everyone. 2012 was another year of aggressive exploration for San Gold. The company completed approximately 221,000 meters of surface and underground drilling to better delineate and extend the known zones of gold mineralization at the Rice Lake, 007 and Hinge mines. Regionally, exploration was completed on the SG1, SG3 and Normandy wet zones because of her excellent potential to incrementally add this to the Rice Lake Mill in the near term.
Based on the additional information from the 2012 drilling, the company released an updated technical report on February 8 of this year. mineral reserves increased to 253,000 ounces which is a 75% increase after accounting for mine analysis since the March 2012 estimate. Additionally, measured and indicated resources increased to 655,000 ounces, which is a 17% increase after accounting for last year’s production. Overall, this technical report provides a solid foundation for the operations and to work from. The geology department has now had an additional year to calibrate the grade estimates to actual production output and improve the confidence in the company’s forecast.
2012 exploration also returned a number of exciting exploration results from within and around the mine. Of significance, drilling from the 26 level at the Rice Lake mine interest back to the interpreted down dip extension of the 007 structure, returning 12.6 grams per ton of gold over six meters and 15.5 grams per ton gold over 11 years. This is significant as it confirms our geological model and proves that the zone extend up and down yet considerable distances and there remains many similar isolated drilling sections in this area that require further follow up drilling. Overall, the company is very encouraged by the results of the drilling program as it continues to demonstrate the potential expansion of existing mineralized zones and the potential of new zones to be discovered both east and west and at depth.
In 2013 the company will continue this aggressive exploration program within the Rice Lake greenstone belt. The company has budgeted in excess of 270,000 meters of exploration diamond drilling. The company continues to focus on two main objectives. First, to upgrade the resources into higher confidence categories and increase reserves within the mining complex. And second, to extend existing mineralized zones and discover new zones on mineralization in the Rice Lake area. The company’s exploration program is designed to develop a larger mining complex that can be exploited through existing infrastructure.
Additionally, the company has also planned exploration of optioned properties in and around the Rice Lake area, with a focus on targets that have the potential to be developed in a relatively short period of time in order to add incremental feeds to the Rice Lake mil. We plan to announce exciting results throughout the year as drilling progresses.
And with that, I’ll turn it back to you Ian.
Thanks Michael. Once again I’d like to emphasize that we are aware of the situation in the markets and we are responding. We have a skilled operations team in place and they continue to perform well. We posted another annual production record for the property this year while holding the line on costs during a period of 30 strong, upward class pressure across the mining industry.
We continue to be one of the lowest cost cash cost producers in the Canadian underground ore mining space. Looking forward, our goal is to generate sufficient cash to fund our operating, capital and exploration expenses in the near term. We are positioning ourselves to do this. Next week we will be releasing Q1 2013 operating results and I expect that we will announce between 16,000 and 17,000 ounces of gold for the quarter. The grade will be similar to Q4 2012.
We are reviewing our mine plan and expect to produce between 75,000 and 90,000 ounces of gold in 2013 with cash costs between $800 and $900 per ounce. We expect to be able to reduce our previously announced capital spending by approximately 20% per quarter for the balance of the year and we’ve already deferred or canceled certain plans in Q1. In the coming months we will be better positioned to comment on the success of this strategy to optimize the operation.
I know things haven’t been easy, but I would like once again to thank everyone on this call for staying with the story. We will continue to generate healthy contributions going forward and I believe the market will soon understand that free cash flows are much closer than we previously thought.
At this time, I’d like to ask the operator to open up the lines for questions. Audrey?
(Operator instructions). We have a question from Derek Macpherson from National Bank Financial. Please go ahead.
Derek Macpherson - National Bank Financial
Just wanted to follow up on the planned reduction spending. Should we be expecting -- is there any other budget line items that you guys have been able to reduce costs in?
Part of our overview, Derek when we began the year, we were looking to primarily focus on 007 and Hinge for about 90% of the overall ounces. We’re now able to look a little bit at the work that’s required to be done in the Rice Lake shaft and we believe we can reduced the planned outage to about a month this year. so that’s going to allow us to bring some Rice Lake ounces that would otherwise not have been coming on stream till next year into the plan a little bit earlier. We’re also trying to assess some of the areas that we’ve had recent drilling success, both in the 26 levels on Rice Lake and also in the 007 area where we can bring some ounces arguably into the plan a little sooner and that will delay our need to go into Cohiba this year. so there is some looking at the mine plan and some optimization. So we certainly think that should lead to some reduction in our cash costs.
Derek Macpherson - National Bank Financial
The 800 to 900 doesn’t include those additional savings?
Derek Macpherson - National Bank Financial
And I guess have you guys -- you’ve obviously been doing [horizontal] [ph] job in the chair for a few weeks. Is there any other opportunity you see right now?
Well, we have done some retrenchment here already in the last two and a half weeks. We’ve reduced approximately 25 positions across the company, including fairly significant reduction in our Toronto office. We are looking at certain overheads and as I mentioned on the call earlier, we’re going to look at some of what we would call non-core assets today and it may be that we’ll have an opportunity to monetize some of those assets if it makes sense to us. So we’re looking at I guess everything and the first step was as I said to do a modest workforce realignment this last few weeks which were essentially complete.
Derek Macpherson - National Bank Financial
Obviously you’ve only been in the chair for two weeks or so, but when can we expect or are you guys going to provide some updated detail on CapEx spending in not only the near term but the medium term going forward? I know you’re not there yet, but …
Yeah. We don’t want to lock any numbers down, but as I mentioned on the call originally we’ve been looking at about $72 million in aggregate between capital development, ramping, raising lateral pushes on 16 and 26 and that also included approximately $19 to $20 million in PP&E. so in both those two categories we’re looking at the kind of work that could be pushed back to potentially next year and we’re even assessing whether or not we do a mid-shaft loading pocket. Certainly it will not happen this year. We’re going to focus on beefing up the shaft with some of those costs to increase skipping capacity. Those plans are being reworked.
The other thing that we’re looking close at is we recognize the importance as you understood from the depletion cost to have a better denominator measured and indicated and we’ll be looking to increase that number so we have a better denominator. And we’re taking steps to upgrade our five year plan and we plan to have that completed in Q2. So that’s going to lead to again based on the operating schedule that will lead to a prioritizing of capital dollars. So a lot of balls in the air, but we’re very comfortable that we have a good plan that’s evolving and we’re very excited about some of our new drill results and we would expect to be trying to give some more exploration results on a bit more timely basis.
Our next question is from Mark Benjamin from M Partners. Please go ahead.
Mark Benjamin - M Partners
Ian, congratulations on the new post. Just going through the notes from this morning’s call, your guidance from 75 to 90 next year. just a question with regards to head grade. Is there a chance we see some better grade later in the year and if so, where would that be coming from?
Yeah, we would certainly expect -- we talked about grade they’re going to be similar to Q4, at least in the first quarter. We’re looking at an overall grade at the year of about 0.15 and we certainly have some better material coming from the 007 zone. The 0.15 is similar to what was actual performance for all last year. grade can certainly if we do a little bit better in that area, grade can improve the ounce profile dramatically and I think for those that have watched the story last year all our metrics were positive with the exception of grade which hurt us in a number of different categories.
Mark Benjamin - M Partners
Michael sounded pretty excited about some of the exploration he was talking about earlier in the call. How fast before some of that comes to fruition with regards to production? Is that more down the line of 2014 the stuff he is working on currently?
I’ll let Mike piggy back my comments, but as I said, when we first put the mine plan together, we had intentionally planned to defer Rice Lake production. On the 26 level we are less than 400 feet away from what we’re calling the 710 zone. Now that’s a down dip extension of the 007 deposits. We are currently drilling it and have been drilling it this quarter and it is currently our plan to be cross cutting out to that zone in Q2 and that will allow us actually to get a bit of a bulk sample and to do some drilling from closer proximity. So that will be brand new area relative to our plan and it’s in proximity to the infrastructure in 26 that’s built. So that’s one example of an area where we think that can help us out. Mike, jump in here.
Yeah. Maybe I can just add that we have done a lot of drilling last year and we have a lot planned for this year and I would say a good portion of that is to increase our confidence in the resources and convert these resources to reserves, but I would say over the last year we have intersected some what appeared to be some new areas of mineralization and we have been refining the geological model over the last six months. We believe we better understand why the gold is where it is and we’re targeting that and we’re going to be releasing some of those results within the next month or two and we’re certainly excited about these results because they’re very, very proximal to where the infrastructure is. So if we can get into these areas to find them, develop and get into them, that’s going to be easy ounces for us to get. So that’s why we’re excited about it.
I think Mark, further to that, we talk about the -- you’ll hear more in the future about the 710 zone. That’s effectively that’s sitting in the Shoreline Basalt and that whole unit is sitting in the hanging wall of the gabber or the SAM unit. Some of the holes that we’ve pushed out through 710 are actually out into the hanging wall of those collective structures and we have some new information. So we’re excited that this is still early stages for this deposit. The fact that we’re finding ore grade material out in the hanging wall of these just it opens up our thesis of gold deposition. So I think as this year goes on we’re going to be pleased to report some interesting new discoveries.
(Operator instructions). We have no further questions registered at this time. I would like to turn the meeting back over to Mr. Berzins.
Thank you, Audrey. On that note I’d like to again thank everyone for joining us on the call today. Thank you and have a great day. Take care. Bye.
For more information, please visit San Gold’s website at www.sangold.ca or contact Tim Friesen, Communications Director at 855-585-4653 or by email at email@example.com. This concludes today’s conference call. You may now disconnect.
Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.
THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.
If you have any additional questions about our online transcripts, please contact us at: firstname.lastname@example.org. Thank you!